German ZEW Economic Sentiment Index Slips Significantly

German investor confidence took a tumble this month in the wake of the crisis in the US subprime mortgage market and slowing growth in the Eurozone economies. The Mannheim-based ZEW Institute’s “economic sentiment” indicator fell for the third consecutive month to the lowest level since December last year. At minus 6.9 points, down from 10.4 points in July, the index remains significantly below its historical average.

Claus Vistesen has the story and the analysis here. This graph he produces really says it all:





The Institute places a lot of emphasis on the impact of the subprime situation (which has of course had significant repercussions in the German banking sector), but as the graph below - which comes from Claus Vistesen's post - shows, GDP growth in both Italy and Germany slowed notably in both Q1 and Q2 2007, so in this sense the sentiment index reading is far from surprising.



Having said this, if we take a look at a slightly longer time series on the index - from 2000 - we can see just how low sentiment currently is, how it first fell sharply and continuously across the second half of 2006, only to then rebound slightly at the start of 2007. I think all of this is reasonably explicable in that most observers expected a stonger initial slowdown in Germany as we went into 2007 (the VAT rise and all that) - I certainly did, and I was wrong - but then the sentiment index soon responds to the renewed uptick (just how much has this uptick has got to do with the boom that has been going on in Eastern Europe is a question I find myself asking, since the German economy has clearly been the major beneficiary from this boom), only to then fall back again. But what is also reasonably clear is that this turn in sentiment is not a simple by-product of recent events in financial markets, since the origins of the change of mood stretch back several months. Following the evolution of this index over the coming months is going to make really interesting reading I think.

Italian GDP Slows in Q2 2007

Economic growth in Italy slowed even further in the second quarter of 2007, according to provisional figures released on Friday by the National Statistics Institute ISTAT. In the April-June quarter gross domestic product increased by only 0.1 per cent, compared with the first quarter of 2007, when GDP grew by 0.3 per cent (see chart below). This is the slowest growth in the last 18 months. Projected growth for 2007 has so far declined from 2.3 per cent based on the first quarter, to only 1.8 per cent at present. This number, apart from being far below the current European Union average of 2.6%, now looks like it may well need further downward revision.



The projections are now also significantly below the estimated 2 per cent growth for 2007 which the government used as a basis for its economic and financial planning document in June. The blueprint envisaged cutting budget deficits, as well as a gradual reduction of the national debt from the current 107 per cent of GDP to 100 per cent of GDP by 2010. Less growth will inevitably result in a smaller increase in revenue, and run the risk of yet more problems with the debt rating agencies.

As the Financial Times says:

If this trend continues, it could create serious difficulties for the centre-left coalition led by Romano Prodi, the prime minister, for whom economic rigour, growth and a reduction of the huge national debt are primary goals.

In general the picture has been becoming reasonably clear from the industrial output numbers we have been seeing, the retail sales data, as well as the consumer confidence readings.

If we look at the chart below which shows year-on-year GDP growth rates by quarter, then it is really starting to look like this cycle may have peaked in the last quarter of 2007.




And if we look at the evolution of Italian GDP growth rates it is clear that the situation is not a new one, average growth rates for the Italian economy have been trending down for the last couple of decades, and it is a hopeless form of wishful thinking to imagine that things will change just like that. If the author of this blog is right this whole process is associated with the steading ageing of Italian society, and if it is then the issue will just not go away, and there will be some explaining to be done to the ratings agencies about just why it was thought to be convenient only two weeks ago, to slow down the implementation of the retirement age reform.

French Industrial Output June 2007

Hard to know how to read this latest data from France. Obviously someone somewhere is feeling the pressure:

Industrial production in France, Europe's third-largest economy, unexpectedly fell in June, led by declines in the output of cars and consumer goods.

Production at factories, utilities and mines dropped a seasonally adjusted 0.5 percent from May, when it rose a revised 0.5 percent, Insee, the national statistics office, said today in Paris. Economists expected a gain of 0.4 percent in June. For the second quarter, industrial output fell 0.3 percent from the prior three months and was unchanged from a year earlier.

Higher interest rates and increased energy prices are weighing on consumer confidence in France at a time when the euro's advance to a record against the dollar and the yen last month threatens to curb exports. France's economic growth is trailing behind the euro-area average for a third straight year.