German IFO Business Confidence November 2007

Well this certainly is a moment with possible interpretations to suit all tastes. The German IFO just came in with a monthly upward rebound. True the bounce was marginal, up to 140.2 from last months 139.9, but still, up is up. So what do you make of that? Well, if we actually look at the chart we can see the numbers are in fact still well down on the autumn 2006 and spring 2007 readings, which more or less fits in with the general picture we are getting.



Interestingly if we turn to an examination of the sub-components in the index we find that the assessment of current conditions rose to 110.4 from 109.6 in October, while the indicator of expectations slipped to 98.3 from 98.6. German manufacturing is undoubtedly getting a good push from the favourable climate for exports (despite the rapidly rising euro), and especially in Eastern Europe where many of the currencies are directly or indirectly pegged to the euro. This impression is confirmed if we look at the readings for trade and industry, which rose from 7 to 7.6, and for manufacturing, which rose from 17.8 to 19.3 and compare these with construction, which fell to minus 21.3 from minus 20.6 and retail, which fell from minus 6.8 to minus 9.2.

As Claus Vistesen said in his revue of Q3 Eurozone GDP performance:

On the face of it the Q3 GDP release from the Eurozone seems to point to a rebound but we should not be fooled. I know that I tend to be a bit of a party pooper sometimes when it comes to the Eurozone but this time around you need to consider I think that the collective mass of almost all respectable analysts and economic commentators seem to agree with my general forecast. As such, all of us Eurozone watchers had pretty much agreed that Q3 all things equal would show a rebound relative to Q2 but given the monthly real economic data and confidence readings which have been rolling in it would also prove to be short-lived.

I think this is it. Steady as she goes, but the nose of the ship is now pointing downwards.

Some Further Snippets on the Q3 Figures from the Eurozone

by Claus Vistesen

cross posted from Alpha Sources

This is really just a small pointer relative to what I have already said in my two recent comprehensive notes on the Q3 GDP numbers as well as outlook from and on the Eurozone. In this way, Spain published a more detailed break-down of the Q3 GDP numbers today. Quite as expected and as I noted it is in particular the construction sector which is beginning to trend down as well as Spanish consumers are winding down what has otherwise been a very steady propensity to spend. From Bloomberg ...

Consumption growth in Spain dropped to its slowest pace in four years in the third quarter as higher borrowing costs cooled property price gains and hiring eased. Household spending grew 2.9 percent from a year earlier, after a 3.3 percent increase the second quarter, the National Statistics Institute in Madrid said in a statement today. The economy grew 0.7 percent in the third quarter from the prior three months, when it expanded 0.9 percent. That matched the initial estimate published Nov. 13. Unemployment rose in the third quarter and hiring slowed as homebuilders cut back on new projects. Growth is set to slow across the rest of the euro region next year as the euro's rise to a record against the dollar curbs exports.

``It really is the beginning of the end of the Spanish boom,'' said Dominic Bryant, an economist at BNP Paribas in London. ``Spanish housing investment will fall by about 20 percent over the next few years, meaning the economy will grow well below trend, which is about 3 percent, next year.''

Meanwhile, news and analysis has also been trickling in on Italy as Edward summarizes in a recent note over at Bonobo Land. The first thing of note is of course that consumer confidence actually rose this month but contrary to what you might expect the high figure recorded springs from the fact that consumers are looking forward to save more. This of course does suggest that relative to actual spending we should not get our hopes up; as Edward notes ...
One surprising detail in this months report is, however, that consumers are saying that they are more likely to save their money than spend it in the near future (as Pillonca imagined they would), possibly becuase they are anticipating that a significant economic slowdown is now close in Italy.

And if you don't know who Pillonca is I can understand since Edward is referring back to his mentioning of a recent analysis posted by Morgan Stanley on the Italian economy (authored by Vladimir Pillonca). In essence, Pillonca is tuning in to, as me and Edward, the fact that Italy might very well see a hefty slowdown as we move forward. The main thrust is this and I cannot but agree;

The Italian – and global – growth outlook seems to be darkening every day, despite the expected bounce-back of growth in the third quarter. We forecast Italian growth to slow sharply next year, to just 1.2%Y, from 1.8%Y this year, and we don’t anticipate a recovery to gather traction until the second half of next year. Risks are skewed to the downside. The possibility of a growth recession next year – defined as two or more quarters of negative quarter-on-quarter growth – is not a remote one.

Italy Q3 2007 GDP and November 2007 Consumer Confidence

Well, we had a positive surprise on the upside from Italy for a change in Q3, since Italian economic growth accelerated, powered it seems by consumer spending on services and manufactured goods, according to the report recently released by ISTAT (we really have to wait till early December to get a clearer picture).

Gross domestic product rose 0.4 percent from the second quarter, when it grew 0.1 percent, and expanded 1.9 percent when compared with Q3 2006.






Where we go from here is really anyone's guess, but there must be strong downside risks. Claus Vistesen has quite a comprehensive summary of the Q3 eurozone situation here. Summing up the Italian performance Claus says the following:

Finally, before summing up we have of course Italy where Bloomberg told us that the Italian economy managed to expand in Q3. But alas what does that matter when the number we have is 0.4% q-o-q which follows, as can be observed above, a o.3% and 0.1% reading q-o-q in Q1 and Q2 respectively. Even those amongst my readers with next to none inclination towards math exercises should have no trouble calculating that the average q-o-q growth rate now stands at a measly 0.27% q-o-q. If we annualize the current figures (i.e. assume 0.4% in Q4) Italy is looking at a annualised growth rate of 1.2% (the official forecast is for 1.9% y-o-y which is well below its peers). However, do take note that these annualised figures rest on a status quo situation which quite frankly seems highly unlikely at this point. In this way, the evolution we are now seeing in Italy is not at all surprising for me and confirms the general perception that when economic fundamentals turn against the Eurozone Italy is one of the first economies to suffer.

Morgan Stanley's Vladimir Pillonca is hardly optimistic either:

The Italian – and global – growth outlook seems to be darkening every day, despite the expected bounce-back of growth in the third quarter. We forecast Italian growth to slow sharply next year, to just 1.2%Y, from 1.8%Y this year, and we don’t anticipate a recovery to gather traction until the second half of next year. Risks are skewed to the downside. The possibility of a growth recession next year – defined as two or more quarters of negative quarter-on-quarter growth – is not a remote one.

as he says:

Consumer spending looks set for a slowdown after an unsustainably strong first half of the year. After all, wages are barely rising once we account for inflation, and both tax pressure and interest rates have risen in the recent past. Forward-looking consumers are likely to react to a more uncertain future, by allowing their savings to rise and their consumption growth to fall.

Is he clairvoyant or something, I ask myself , since this is exactly what the most recent ISAE survey is showing consumer expectations to be (for a rise in savings that is) at this point (and Pillonca's piece was written before this data release).

In fact Italian consumer confidence surprisingly rose to a six-month high in November. The Rome-based Isae Institute's index, which is based on a poll of 2,000 households, rose to 107.6, the highest level since May, from 107.3 last month. However if we look at the chart we will see that the index has hardly budged since September, and that we are still in comparatively low territory.




One surprising detail in this months report is, however, that consumers are saying that they are more likely to save their money than spend it in the near future (as Pillonca imagined they would), possibly becuase they are anticipating that a significant economic slowdown is now close in Italy.

Of particular note is the fact that a sub-index measuring household confidence in the ability to save rose to 143 from 132, while another measuring the ability to put money away in the future rose to minus 76 from minus 86. On the other hand, consumers grew ever more negative about future growth, with this component of the index falling to minus 35 from minus 29 in October.

I will try and find the time to do a more in-depth analysis of Italian GDP when the full results are published in early December.