Saturday, May 23, 2009

EMU Economic Indicators Preview

(Week of 25 to 31 May 2009)

  • German ifo business climate (May): unchanged
  • EMU industrial confidence and economic sentiment (May): unchanged
  • German CPI inflation (May): decreasing
  • M3 growth (March): declining further
  • German adjusted unemployment (May): sharper rise
  • EMU inflation flash estimate (May): down

The ifo business climate for Germany might have only stabilised in May, after its unexpected surge in April. However, the German ZEW economic sentiment and the US ISM manufacturing index have improved recently. German yield spreads have widened somewhat, as short-term interest rates have continued declining and long-term rates have gone up. The DAX has recovered too. On the other hand, the euro has appreciated and crude oil prices have increased.

For similar reasons, most of the other economic climate indicators in the EMU - Belgian and French business confidence, French consumer confidence and EMU economic sentiment and EMU industrial confidence - are likely to have remained more or less unchanged in May, after having soared in April. The German GfK consumer confidence for June might have remained unchanged at best and Italian consumer confidence could have suffered a setback in May, after its surprising recovery. Italian business confidence will probably have continued improving in May.

Q1 German GDP is unlikely to be revised significantly. The detailed breakdown of the components will show that no demand component contributed positively to overall GDP growth, except for government and private consumption.

German retail sales are likely to have increased slightly in April, as retailers' business assessment improved but consumer confidence deteriorated. French consumer spending probably went up somewhat in April, as consumer confidence improved. EMU industrial new orders might have decreased slightly in March and February's figure might be revised downwards. The EMU current account is likely to have deteriorated in March.

The preliminary results for national German CPI for May are due to be released on Wednesday at the latest. We expect German consumer prices to have gone up by 0.1 % month-on-month; the annual rate would then decrease to 0.2%. On the energy side, there are mixed signals: gasoline and heating oil prices have gone up since April, whereas gas prices are expected to have gone down. On the other hand, electricity prices could have risen again. Furthermore, many retailers are expected to have reduced their prices for clothing, food and other products in the last few weeks. Following the usual seasonal pattern, package tours could have become cheaper, whereas prices for accommodation services could have increased.

The Eurostat flash estimate is likely to show that euro area inflation decreased to 0.2% yoy in May. This would correspond with a monthly increase in HICP of 0.2 % in unadjusted terms. But both rates could also turn out to be slightly lower.

We expect M3 growth to have remained subdued in April. However, individual components seem to be developing quite differently, mainly reflecting low short term interest rates and thus low opportunity costs of holding cash. Risk appetite has increased in April, overnight deposits and money market funds have been less attractive for investors. Currency in circulation is actually rising at a rate of over 13% yoy, possibly supported by demand from eastern Europe. Overall, we expect M3 to have risen only moderately at 3.8% yoy due to a stronger base effect. Credit growth is falling fast: growth of loans to the private non-bank sector could have declined further in April.

Due to short-time working allowances, for which the government has extended the maximum entitlement period to two years, German unemployment has only risen moderately so far. According to the Federal Employment Agency, if it had not been for short-time working, the April unemployment level would have been about 450,000 higher and would already have exceeded 4 million. Nevertheless, we are expecting the labour market to deteriorate further: in May, the adjusted unemployment level could have jumped by about 100k, after 58k in April. The unemployment rate is likely to have risen to 8.5%, 0.9 points above the cyclical low in November 2008.

The harmonized EMU unemployment rate could have gone up to at least 9.2% in April. In many European countries, particularly in Spain, unemployment has been rising since spring 2008, and it is now increasing rapidly in Germany too.


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