EMU Economic Indicators Preview (Week of 30 November to 6 December 2009)

• German retail sales (October): down
• German adjusted unemployment (November): short-time work still dampening upward trend
• EMU inflation flash estimate (November): back in positive territory
• ECB council: rates unchanged, gradual exit from non-standard measures

German retail sales are likely to have decreased in October. German consumer confidence improved, but retailers’ business assessment plummeted. The Purchasing Managers’ Indices for the German and EMU manufacturing sector in November are unlikely to be revised significantly. The same applies to Q3 EMU GDP.

The Eurostat flash estimate is likely to show that euro area inflation returned into positive territory for the first time since May. We expect an inflation rate of 0.5% yoy in November, especially as gasoline prices are no longer exerting a dampening base effect. This would correspond with a monthly HICP increase of 0.1 % in unadjusted terms.

Despite the severe recession in 2008 and early 2009, German adjusted unemployment has fallen every month since July, mainly due to the extensive use of short-time work schemes and statistical changes. Both factors are still dampening the underlying upward trend, but despite the extension of short-time working schemes into next year, we expect more and more firms to cut jobs because of low capacity utilisation. After having fallen unexpectedly by 26k in October, adjusted unemployment is likely to have remained unchanged at best in November.

The harmonized EMU unemployment rate has been rising since April 2008, by a total of 2.5 percentage points to 9.7% so far. The regional differences are striking: while the German rate was only 0.2 points higher in September than in March 2008, the Spanish rate jumped by almost 10 percentage points in the same period. We expect the upward trend in the EMU unemployment rate to continue for quite some time to come; but as the rate in Germany has remained stable, the harmonised EMU rate might only have risen by 0.1 percentage points to 9.8% in October.

The ECB Council will hold its regular meeting on Thursday. No change of policy rates is to be expected. However, as the economic recovery is gaining a foothold and financial markets are stabilising, the council is likely to decide to gradually phase out non-standard measures. In particular, the provision of unlimited long term refinancing is to be scrutinized. Presumably, the ECB will not extend 12-month repos into 2010; the council is also discussing whether to make the refinancing rate in the forthcoming 12 month tender in December adjustable to changing refinancing costs. Moreover, the staff projections will be published. In comparison with the September projections, the growth forecast for 2010 will be revised up substantially. Other revisions are likely to be smaller. Projections for 2011 will be given for the first time.

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