The European PMI data may send shivers down your spine. Particularly the South European PMI data - Spain, Italy and to some extent France - where the temperature has fallen below the freezing point. For instance, the index for the service sector is a t the lowest level ever in France, Italy and Spain (however, the level was a bit lower in June than in July) but the industrial index is the lowest in Spain and only twice has it been lower in Italy. The French index is also low - even though for a period it was lower in 2001.
The weak development of the PMIs seen over recent months, has once again in Europe shifted focus to growth - even though the inflation rate is still above 4%. However, this development has not prompted the ECB to surrender completely. But then, the bank's clear mandate is that, above all, it must ensure price stability - i.e. an inflation rate below, yet close to 2%. The ECB has, however, begun to acknowledge that the economic growth will be weaker than it previously expected, and of course that gives rise to concern on the part of the bank.
And rightfully so, as the PMI data signal that growth will also be very weak in Q3 and perhaps also in Q4. The somewhat forward-looking indices among the PMIs (order inflow, order book and inventories) do not indicate any encouraging development for the coming months.
Therefore we also assess that we shall see even weaker PMI data for August for service as well as industry. That will be so even though the oil price has fallen and the EUR has weakened. It may, however, bring a bit of relief to the European companies. And to the consumers, this may have the implication that once again there are prospects of a positive trend in real wages in early 2009. The reasons will be stronger wage increases and that inflation may very well have peaked this time around and will begin to fall.
Of course, we will see focus on the general indices, but more importantly, it will be interesting to see how the forward-looking indices develop. There is a not inconsiderable risk that euro zone will see weak growth figures for a longer period than initially expected. We do, however, still expect that the economic growth during the middle quarters of the year will be weakest and then improve slightly.
This week's other highlights
- The US: Residential construction, Philly Fed and producer prices
- Germany: ZEW indicator
- The UK: Minutes from monetary-policy meeting and retail sales
- Japan: monetary-policy meeting at the BoJ
- Norway: GDP
Monday
The US: NAHB housing market index, August
Home builders' gauge of sales and expectations, NAHB, is interesting, since it gives an impression of the situation in residential construction - the sector of the economy which was definitely hit the hardest.
The home builders have been similarly pessimistic as the housing market index has hovered at a level just below 20 for quite some time while the historical average is just above 50. The fact that sentiment has not improved lately is seen from the decline in July to index level 16 - the definitely lowest level ever.
Conditions for residential construction have not improved lately. The short as well as the longterm mortgage rate have risen and banks have tightened even more, particularly with respect to home loans. This development may prolong the crisis that we have seen in the housing sector since the autumn of 2005.
Moreover, the prospects for the construction companies deteriorate as one of the - even though uncertain - leading indicators for the index is the construction companies assessment of home sales in the six-month term. This assessment shows further deterioration in July. On the other hand, it should also be noted that the index is at a very low level. On the whole, we expect an unchanged or negative development.
Japan: monetary-policy meeting at the BoJ
We expect the BoJ to leave interest rates at 0.5% at which they have stood since the hike in February 2007.
Economic growth in Japan is in the doldrums. The export sector is affected by the global slowdown in growth, and there are no prospects that the domestic economy will take over the part as growth engine as personal spending as well as investments are under pressure. Even though consumer prices have risen significantly by Japanese standards (2.0 % y/y in June) and now are the highest they have been for ten years, there are no signs that inflation is generally on the rise and core inflation (exclusive of food and energy prices) remains at about zero.
On that background, we expect the BoJ to keep interest rates unchanged for the rest of the year. A hike is not likely until H2 2009 and will not be made until the economy is back in swing or core inflation begins to show a convincing, positive trend.
For the first time, the BoJ will now issue a statement together with the interest-rate decision; in this statement the reasons behind the decision as well as the growth and inflation prospects will be discussed. Until now, the BoJ has only issued detailed explanations in connection with changes in the interest rate and when the interest rate was kept unchanged, the BoJ has only stated whether or not the decision was unanimous.
Tuesday
The US: producer prices - July
This time the producer prices are not quite that important as the consumer prices have been released and as the producer prices do not reflect the major declines in the oil and food prices that we have seen lately.
The strong increase in producer prices have primarily been fuelled by the rising energy and food prices, but undoubtedly the July figures will not reflect much of the fall in the oil prices and other commodity prices, as normally producer price data are gathered during the week including the 13th day of the month. Because oil prices, as a matter of fact, peaked at about that time in July, we may actually risk seeing further increases in producer prices. Moreover, the companies also react with some delay when commodity prices increase as many companies only change their prices fairly seldom (according to Blinder, about a third of the companies only change their prices once a year). However, it should be noted that several of the prices included in the producer prices have fallen over a longer period of time than the oil prices and that may have a lowering effect on producer prices for July.
We may therefore see moderate increases in the producer prices for July.
The US: Home construction - July
Building permits and housing starts are among the most important economic indicators this week. Residential construction has fallen massively, which is reflected by the fact that the number of building permits for single-family homes has fallen by no less than 65% since late 2005. This is the steepest fall ever.
Residential construction and building permits rose steeply in July, but that can solely be attributed to changes in the New York building regulations for multi-storey buildings valid as of 1 July and due to which construction companies have accelerated construction as well as applications for building permits from July to June. If we adjust for this effect, residential construction fell in June by 4%. Therefore, residential construction and building permits will fall very steeply in July - probably by more than 10%.
At this development will solely affect construction of multi-storey buildings in the New York area, focus will primarily be on singlefamily homes in and outside the north-eastern area. The development in the construction of single-family homes has in recent months been that of some stabilisation and therefore it will be most interesting to see whether this trend will continue. When we look at the development of the housing market index the likelihood of such a development is not, however, very strong.
Therefore we expect a steep decline in housing starts in July.
Germany: ZEW
For quite some time now, the ZEW has signalled a significant weakening of the German economy - yet this has not materialised. In H1, growth was on average at 0.4%, q-o-q - with an increase of 1.3% in Q1 and -0.5% in Q2. For quite some time, the ZEW has signalled recession in Germany, which we will not rule out will take place in Q2 and Q3 - at least in technical terms - as growth may fall in both of these quarters. We still assess, however, that the ZEW reflects a considerably weaker German economy than we are actually seeing and therefore we do not consider the level indicative of the economic development - what is more important is the change in the ZEW. We expect that ZEW will increase in August - particularly when bearing in mind the falling oil prices - and also because at the moment the ZEW is at a historically low level.
Wednesday
The UK: Minutes of the BoE interestrate meeting held on 6-7 August
The BoE decided to hold interest rates at 5% at the meeting earlier this month. This was not surprising, given the BoE's dilemma over sharply rising inflation and economic slowdown. A more detailed explanation for the interest-rate decision will be provided in the minutes.
The inflation report that was just released still indicates that the BoE will opt not to increase its interest rate to fight the rising inflation and that there are prospects of further interest-rate cuts, yet not in the next few months. The growth expectations were reduced further relative to the May report, and the BoE now expects flat growth over the coming year, and also growth expectations for the coming years were downgraded. Also, the BoE upgrades its expectations of the inflation in the short term.
Now it is expected that inflation will peak at about 5% at the end of the year and then it will gradually decline to a level below the 2-year target. The BoE does, however, emphasise that the uncertainty of the growth and inflation estimate is higher than normally and that the risks relating to growth is primarily on the downside while for the inflation they are on the upside.
The most interesting point of the minutes will be how the members of the monetary policy committee voted. We expect that once again the monetary-policy committee will be undecided having three different views. At the July meeting, Besley voted in favour of an interest-rate hike and given the recent strong increase in inflation, it cannot be ruled out that one or more members will jump on this bandwagon. Also, it is very likely that Mr Blanchflower voted in favour of a cut as he has done since October last year.
Thursday
The US: Jobless claims - week 33
Initial jobless claims are an indicator of how many new people join the unemployment queue. The claims are used as an indicator of developments in the labour market based on the following: the more claims, the weaker employment growth.
Jobless claims are also one of the best indicators of the trend in employment, and this week we see extra focus on the data since this is the week when the data for the job report are collected. The figures have not become less interesting since they have risen sharply over the past two weeks, but part of the increase is due to technical matters in the form of an extension of the cash benefit period. Consequently, unemployed who have received daily cash benefits over a period of time, have applied again. In addition, it is approx. the time when the car factories lay off their employees on a temporary basis, because they adjust their machinery to the new models. This factor always makes the jobless claims figures uncertain at this time of the year.
The US: Philly Fed August
Philly Fed is one of the regional indicators of industrial confidence which are used as a gauge of how the economy is doing at state and federal level. There is a good correlation in the longer term between Philly Fed and ISM, although Philly Fed shows wider fluctuations than ISM in the short term. The development of Philly Fed has been much weaker than that of ISM in the past six months. In addition to the overall index, focus will be on new orders, employment and the price index.
The euro zone: PMI August
See This week's highlight.
The UK: retail sales - July
The highly volatile retail sales grow constantly, but growth in on the decline, and the rate of increase y/y is now at 2.2%. We anticipate that retail sales will decrease even further in the coming months, but following the very sharp decline in June, retail sales may make a slightly upwards correction again in July.
The UK economy is slowing down, and consumers are under pressure from rising inflation, falling house prices as well as tighter credit conditions. Retail sales have long been surprisingly strong, but it now seems to flag off in line with the indications received from various surveys of retail sales. British Retail Consortium announced a fall again in July, and the CBI index for retail sales dropped back in July to its lowest level since 2005.
Norway: GDP, Q2
The solid economic boom for more than four years has been replaced by an economic slowdown since global economic growth is on the decline, the credit conditions have been tightened and Norwegian consumers are under pressure on several fronts. Growth was, however, surprisingly sluggish in Q1 (0.2% q/q), and we expect that growth will in Q2 be somewhat higher (around 0.4%-0.7% q/q), and the growth will gradually decrease in the coming quarters. We anticipate, however, that Norway will see a soft landing with continued moderate growth.
Since 2007, households have shown a negative savings ratio. The higher interest expenses and the falling house prices will contribute to putting a damper on the demand from households and contribute to a higher savings level. The rising inflation also squeezes consumers although we still see fair growth in real wages due to the high wage increases, and the sustained tight labour market is also supportive. All in all, we expect to see moderate growth in private spending.
The volatile fixed investments plunged in Q1. We anticipate that they will regain some of the lost ground in Q2, supported by the high oil prices and continued thick order books. Also housing investment dropped back in Q1 (due to high building costs and lower house prices), and in this respect we expect to see a sustained sluggish development in Q2. We also expect that the slowdown in growth at Norway's trading partners will leave its mark on exports.
Friday
The UK: Q2 GDP - 2nd announcement
According to the first announcement of GDP data, growth for Q2 fell to 0.2% q/q and 1.6% y/y which is the lowest growth rate since 2002. This statement includes the demand components and a revision of growth. However, we do not expect a sharp revision.
The tightening of credit standards hits both companies and households, and the latter is under further pressure due to slow real wage growth and falling house prices. Therefore, we anticipate that the growth in private spending slows down although retail sales are still showing fair but decreasing growth rates. Due to the prospects of slower economic growth globally as well as in the UK, businesses will presumably be more cautious about making investments. The lagged effect from the exchange-rate weakening over the past year contributes to the fact that, despite the global economic slowdown, there are still prospects of export growth, and imports will presumably be under pressure due to lower domestic demand. Therefore, net exports rather than domestic demand will be boosting the UK economy.
Jyske Markets - FX Research http://www.jyskebank.dk/finansnyt
The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor for transactions made on the basis of the information or the estimates of the analysis. The estimates and recommendation of the analysis may be changed without notice.