EMU Economic Indicators Preview (Week of 22 to 28 February 2010)

• German ifo business climate (February): slightly up
• EMU industrial confidence (February): up
• EMU economic sentiment (February): unchanged
• German adjusted unemployment (February): sharp increase due to snow and cold weather
• M3 growth (January): slightly positive, temporarily
• German CPI inflation (January): lower

The ifo business climate for Germany could have continued to improve in February, albeit only slightly, as the correlated indicators have sent mixed signals: the US ISM manufacturing index has gone up, but the German ZEW economic sentiment has deteriorated; the euro has depreciated, but crude oil prices have been fluctuating. German yield spreads have narrowed, as long-term interest rates have decreased more than short-term rates. Furthermore, the DAX has gone down. The German GfK consumer confidence for March could have continued to deteriorate.

Italian consumer confidence might have recovered in February, after having plummeted the month before. Italian and Belgian business confidence could have risen more sharply than in January. However, French consumer confidence might only have stabilised in February. Therefore, EMU industrial confidence is likely to have improved, whereas EMU economic sentiment might only have remained unchanged in February. EMU consumer confidence is not expected to be revised significantly.

Q4 German GDP is unlikely to be revised significantly either. The detailed breakdown of the components will probably show that only net exports contributed positively to overall GDP growth, with exports up and imports down. Private consumption, fixed investment and changes in inventories are likely to have dampened growth.

Despite the recent improvement in French consumer confidence, French consumer spending could have suffered a setback in January, after having soared the previous month. EMU industrial new orders could have fallen in December, like the corresponding German figure.

The preliminary results for national German CPI for February are due to be released on Friday. We expect German consumer prices to have increased by 0.3% month-on-month, which would lower the annual rate to 0.5%. Due to typical seasonal effects, prices for accommodation services and package tours will have been higher than in January. We expect clothing prices to have gone up as well. On the other hand, lower heating oil and gasoline prices could have shaved about 0.1 percentage points off the monthly inflation rate. Food prices could have decreased again.

Final HICP inflation in the eurozone will probably be confirmed at 1.0% yoy in January; this would correspond with a monthly inflation rate of -0.8%. In the coming months, inflation is expected to be around 1 %.

After falling in the second half of 2009, adjusted unemployment rose slightly by 6k in January. However, mainly because of the unusually severe winter weather, we predict that adjusted unemployment will have increased sharply by 80k in February, and the unemployment rate could have gone up by twotenths of a percentage point to 8.4%. Up to now, the extensive use of short-time work schemes and statistical changes have considerably dampened the underlying upward trend of unemployment in the official statistics. But despite the marked improvement in business climate indicators, we expect more and more firms to cut jobs in the course of 2010 because of cost pressures and low capacity utilisation.

Money supply M3 rose sharply in December. However, the increase could well turn out to be temporary, reflecting some window dressing efforts by banks. After strong increases in December, we expect overnight deposits and repurchase agreements to have fallen in January; as interest rates remained extremely low, term deposits are likely to have contracted further. Overall, we expect M3 to have decreased by more than €20bn mom in January. Nevertheless, annual growth is likely to have edged up in January, from -0.2 to 0.2%, before falling back below zero in the coming months. Credit growth should have remained weak in January. Whereas loans to households have started to rise moderately, loans to corporates are continuing to fall. All in all, we expect loan growth to “other euro area residents” (to the private domestic non-bank sector) to have returned into negative territory, to about -0.4% yoy (down from 0.0% in December).

BHF-BANK
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