(Week of 30 March to 5 April 2009)
- EMU industrial confidence and economic sentiment (March): down
- German adjusted unemployment (March): sharp rise
- EMU inflation flash estimate (March): down to 0.5% yoy
- German retail sales (February): unchanged
- ECB: set to cut rates to 1.00%
EMU economic sentiment and EMU industrial confidence will probably have declined in March, like most of the corresponding national indicators. The Purchasing Managers' Indices for the German and EMU manufacturing sector in March are unlikely to be revised significantly. German retail sales are likely to have remained more or less unchanged in February, as retailers' business assessment improved but consumer confidence deteriorated.
In general, German unadjusted unemployment declines noticeably after the winter months, but this March, due to the recession and unusually cold temperatures having a dampening effect on outdoor jobs, we only expect a slight decrease. Thus adjusted unemployment could have risen by about 50,000 in March. The figures would be even worse if the government had not eased the terms for short-time work allowances.
The harmonized EMU unemployment rate could have gone up from 8.2% to 8.4% in February. In many European countries, particularly Spain, unemployment has been rising since spring 2008, and now it is increasing in Germany too.
The Eurostat flash estimate is likely to show that euro area inflation decreased to 0.5% yoy in March. This would correspond with a monthly increase in HICP of 0.3 % in unadjusted terms. But both rates could be slightly higher. The monthly increase will have been mainly due to higher prices for clothes in several EMU countries. On the other hand, food and energy prices are expected to have gone down.
Several ECB representatives have repeatedly hinted that there is still scope to cut interest rates. Moreover, the economic outlook for the euro area has deteriorated: steep declines in manufacturing output, exports and new orders give some indication of what real GDP in Q1 will be like. If the latest speech of Vice- President Lucas Papademos reflects the Council's views, the ECB has once again downgraded its economic assessment. Against this background, we expect the ECB refinancing rate to be cut by another 50 bp to 1.00% on Thursday. The ECB deposit facility rate, which is an important point of reference for the overnight rate, is likely to be reduced as well. However, opinions differ as to how much. Keeping in mind that the spread between refinancing and deposit rate (re-)widened to 100bp in January, it would make sense to maintain that spread and to cut the deposit rate to zero. Furthermore, we expect the ECB council to signal its readiness to consider additional "non-standard" policy instruments. Vice-President Lucas Papademos recently pointed out two options: firstly, extending the maturity of central bank liquidity provided to banks, and secondly, purchasing private debt securities in the secondary market.
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