Services in the Eurozone
Amidst a raising ECB, low inflation and industrial output on the upside you could easily be lulled into believing that the Eurozone actually was on the path to a sustainable recovery going into to 2007. This does not apply if you have been reading Alpha.Sources, of course :). I have been talking about the so-called fundamentals of the Eurozone economy many times before but one thing which I have not pointed to is the consistent slowdown in services which after all count for the majority of economic activity in the Eurozone.
(From Bloomberg - Bold parts are my emphasis)
Growth in European service industries from banking to telecommunications, the biggest part of the economy, unexpectedly slowed in October.
Royal Bank of Scotland Group Plc's services index fell to 56.5 in October, the fourth straight decline, from 56.7 in September, Reuters said. Economists expected an increase to 57, the median of 33 estimates in a Bloomberg News survey showed. A level above 50 indicates growth.
The fastest economic growth in six years has probably peaked as expansion in the U.S., destination of about one-fifth of European exports, slowed. European Central Bank President Jean-Claude Trichet signaled borrowing costs are set to keep climbing, saying last week that the bank is poised to raise interest rates for the sixth time in a year in December to keep a lid on inflation.
``As soon as March there will be a marked slowdown,'' said Marc Touati, chief economist at Natexis Banques Populaires in Paris. ``In a year's time, the ECB will say `sorry we shouldn't have raised rates so much' and will perhaps cut them by the end of 2007 or beginning of 2008.''
In terms of the fundamentals which include, fiscal tightening in key member countries in 2007, the demographic outlook, a slowing US, and an ECB with a mantra of vigilance against inflation I luckily do not have to repeat myself; at least not too much. Consequently, the FT is running a piece today which highlights the long term view and even though the article is behind the firewall the excerpt is very much to the point I think.
(Bold parts are my emphasis)
Tomorrow, European Union finance ministers will discuss a timely European Commission report on the sustainability of public finances. After several years when the stability and growth pact, the eurozone’s budgetary rules, was little more than a political inconvenience and embarrassment for the laggards – leading to a sweeping reform last year that rubber-stamped excessive deficits in “exceptional circumstances” – it seems most countries are returning to the virtuous path of fiscal discipline.
Buttressed by healthier growth, at least by continental European standards, Germany and France are set to comply with the deficit ceiling of 3 per cent of gross domestic product. Even Italy is making serious efforts to bring its runaway deficit under control. Against the backdrop of good economic news, the much-needed public debate on fiscal sustainability is in danger of being drowned out. Far from being in safe waters, either in its international competitiveness or in the stability of its public finances, Europe needs an honest, long-term view on this issue.
On a last note,
It is really a big mistake of me that I have not yet included Ivana Bottini from Fxtalks in my talks about the Eurozone yet. I am not mentioning Fxtalks because she agrees with me; in fact Bottini is my outright nemesis here and if you are growing tired of all my talk about fundamentals of the Eurozone and stubborn criticism then Fxtalks would be a good place to start. Notice for example her recent post about the FT discourse on the Eurozone which leads her to conclude that the newspaper is populated by raving loonies. I link to the FT all the time on the Eurozone so I guess that would make me ... ermm ok, well remember that differentiation is always good.