Sunday, February 22, 2009

EMU Economic Indicators Preview

(Week of 23 February to 1 March 2009)

  • German ifo business climate (February): more or less unchanged
  • EMU industrial confidence and economic sentiment (February): down
  • German adjusted unemployment (February): sharp rise
  • German CPI (February): unchanged at 0.9% yoy
  • M3 growth (December): private sector loans curbed

The ifo business climate for Germany might have remained more or less unchanged in February; business expectations could have improved, but the current assessment will probably have deteriorated. The German ZEW economic sentiment and the US ISM manufacturing index went up in February. The German yield spread has improved, because short-term interest rates have continued declining, while long-term rates have been fluctuating at low levels. The euro has depreciated and the crude oil price seems to have stabilised at its present low level. However, the DAX has been fluctuating at low levels too.

For similar reasons, Italian business confidence could have remained the same too, whereas French and Italian consumer confidence and Belgian business confidence could have suffered setbacks in February. The German GfK consumer confidence for February is likely to have deteriorated. Thus, EMU economic sentiment and EMU industrial confidence will probably have declined.

Due to the sharp economic downturn, the positive trend on the German labour market came to an end in November, and since then, adjusted unemployment has increased by 93,000. In February 2009, adjusted German unemployment could have risen by 65,000, as, in addition to the recession, very cold temperatures will have had a noticeable effect on outdoor jobs. The figures would be even worse if the government had not extended the entitlement period for short-time work allowances to 18 months.

The harmonized EMU unemployment rate could have gone up to at least 8.1% in January. In many European countries, particularly Spain, unemployment has been rising since spring 2008, and now it is increasing in Germany too.

A significant revision of German GDP in Q4 2008 is unlikely. The detailed breakdown of the components will show that investment in machinery and equipment has been a drag on overall GDP growth. Net exports have dampened GDP too, with exports decreasing more than imports. Furthermore, Destatis (the German Federal Statistical Office) has already said that private consumption has declined, but that changes in inventories have increased.

French consumer spending is likely to have remained stable in January, as French consumer confidence improved. EMU industrial new orders are expected to have decreased further in December, just as German industrial new orders did. The EMU trade balance improved in December, and the EMU current account is likely to have done so too.

The preliminary results for national German CPI for February are due to be released on Thursday at the latest. We expect German consumer prices to have risen by 0.4% mom; the annual rate would remain unchanged at 0.9%. Prices for accommodation services and package tours are expected to have increased. There are mixed signals for energy products: Heating oil prices have gone down compared to January, whereas gasoline prices have increased. Many utilities announced higher electricity prices as from February as well. But on the other hand, gas prices are expected to have gone down further. Food prices could have continued falling. After the significant discounts last month, clothing prices could have recovered again. Final HICP inflation in the eurozone will probably be confirmed at 1.1% in January, which would correspond with a monthly inflation rate of -0.8%. Eurostat will also publish the new country weights following Slovakia's entry into the eurozone on 1 January2009.

EMU money supply M3 rose by €122bn (M1 by €111bn) in October, more than twice the average of the previous 12 months. Since then, the monetary expansion has faded away. We expect the situation to have normalized somewhat in January, with M3 expanding moderately by about €30bn mom. Thus the annual rate would decline from 7.3 to 6.8%. Credit growth, however, is likely to have remained depressed. As the financial crisis deepened after the Lehman default, banks became much more reluctant to provide loans. Moreover, banks removed significant amounts of loans from their balance sheets through sales or securitisation. In December, loans to the domestic private non-bank sector fell by €47bn, the monthly flow turned negative for the first time. We expect the downward trend to have persisted in January, albeit less sharply. Against this background, the growth rate of loans could have fallen from 5.8 to 4.9% yoy.


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