Sunday, September 20, 2009

EMU Economic Indicators Preview (Week of 21 to 27 September 2009)

  • German ifo business climate (September): up
  • PMI manufacturing indices Germany and EMU (September): up
  • M3 growth (Aug): decelerating further

The ifo business climate for Germany is likely to have continued improving in September, but probably not as much as in August. The US ISM manufacturing index has improved substantially again, but the German ZEW economic sentiment only slightly. The DAX has rallied and crude oil prices were slightly lower. German yield spreads have been fluctuating, as short-term and long-term interest rates both have tended to decrease slightly. The euro has continued to appreciate.

For similar reasons, Belgian business confidence as well as the Purchasing Managers' Indices for the German and EMU manufacturing sector are only likely to have improved slightly in September. However, French business and consumer confidence have probably gone up significantly between July and September.

French consumer spending might have increased between June and August. French GDP in Q2 is unlikely to be revised significantly. EMU industrial new orders will probably have increased in July, just like the corresponding German figure.

Two opposing forces are affecting bank balance sheets at the moment. On the one hand, (short-term) interest rates are very low. As there is little incentive for investors or depositors to tie up their money, funds are shifted into overnight deposits - at the expense of term deposits and other interest bearing components of M3. On the other hand, the deleveraging process is continuing. To improve capital ratios, banks are trying to reduce their holdings of risky assets or, at least, trying to avoid giving additional loans. This trend is being reinforced by the perceived increase in credit risk. In our view, the latter is the dominant factor driving monetary developments. We expect loans to “other euro area residents” (to the private domestic non-bank sector) to have risen only modestly, the annual rate falling from 0.6 to 0.0% in August. Loans to non-financial corporations are likely to have contracted once again. M3 growth is decelerating further. The massive increase of overnight deposits in July is likely to be partly reversed; other M3 components are mostly on a downward trend. Overall, we expect M3 to have fallen on a monthly basis; the annual growth rate could have decreased from 3.0 to 2.3% yoy.


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