EMU Economic Indicators Preview (Week of 25 to 31 January 2010)

• German ifo business climate (January): unchanged
• EMU economic sentiment and industrial confidence (January): unchanged
• German CPI inflation (January): increasing, but still low
• EMU inflation flash estimate (January): inflation up
• German adjusted unemployment (January): cold weather could have had a negative impact
• M3 growth (December): slightly negative

The ifo business climate for Germany will probably have remained unchanged in January. The US ISM manufacturing index has risen, but the German ZEW economic sentiment has deteriorated. German yield spreads widened until early January, only to narrow slightly again thereafter, just like long-term interest rates, whereas short-term rates have decreased. The DAX went up too initially, but has now fallen somewhat. However, the same applies to crude oil prices. Since early December, the euro has depreciated on average. The German GfK consumer confidence for February could have continued to deteriorate.

French consumer confidence could have at least stabilised in January, while Italian business and consumer confidence might have suffered setbacks, after having soared in December. Therefore, EMU economic sentiment and industrial confidence are likely to have remained unchanged in January.

French consumer spending might have recovered in December, after the recent improvement of French consumer confidence. The EMU current account could have remained more or less unchanged in November, as the EMU trade balance and the corresponding German figures sent mixed signals.

The preliminary results for national German CPI for January are due to be released on Wednesday. We expect German consumer prices to have declined by 0.3% month-on-month, which would correspond to a positive annual rate of 1.1%. Due to typical seasonal effects, prices for accommodation services and package tours will have decreased significantly in comparison to December. We expect clothing prices to have gone down as well. On the other hand, higher energy prices could have pushed up monthly inflation by a good 0.2 percentage points. In the coming months, CPI figures are expected to remain around 1%.

The Eurostat flash estimate is likely to show that euro area inflation increased further but is still moderate. We expect an inflation rate of 1.3% yoy in January. This would correspond with a monthly HICP decrease of 0.5 % 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 in the official statistics, but despite the extension of short-time working schemes into 2010, we expect more and more firms to cut jobs because of low capacity utilisation. In addition, unfavourable weather conditions could have had a negative impact at the beginning of the year. Thus unadjusted unemployment could have jumped by 375k mom. We expect adjusted unemployment to have gone up by 25k in January, raising the unemployment rate slightly to 8.2%.

The harmonised EMU unemployment rate has been rising since April 2008, by a total of 2.8 percentage points to 10.0% in November 2009. However, the German rate was only 0.2 percentage points higher. We expect the upward trend in the EMU unemployment rate to continue for quite some time to come; but as the German rate has remained stable, the harmonised EMU rate might only have risen by 0.1 percentage points to 10.1% in December. The average unemployment rate for 2009 will have gone up to 9.4% from 7.6% the previous year.
As (short-term) interest rates remain on a very low level, funds are still being shifted into overnight deposits - at the expense of term deposits and other interest bearing components of M3. The decline in loans to the private sector will probably have continued; lending to non-financial corporations in particular is likely to have declined further, whereas loans to private households seem to be levelling off. All in all, we expect loan growth to “other euro area residents” (to the private domestic non-bank sector) to have remained in negative territory, at about -0.3 % yoy. After falling sharply in November, we expect M3 to have remained broadly unchanged mom in December. Thus the annual M3 growth rate could have fallen from -0.3 to -0.6% yoy.

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