Beginning to Pinch in the Eurozone?

It is of course always easy to cherrypick news which suit your own forecast in your attempt to come off as the smartest forecaster on the blo(g)ck. Nothing of course could be further from the truth and for the record I still maintain my surprise that the Eurozone economy is throddling along in Q1 07 at the pace it currently seems to have sustained. However, perhaps (just perhaps) there are now signs that things might change bit. Let us begin with what is surely going to cause much rumblings around the market jungle drums in the near future. As such both real estate and bank stocks in Spain took a hefty dive today which of course is spawning much ado about the potential implosion of the Spanish property boom which has fuelled the domestic economy (and for that matter the Eurozone's) in the past years. In many ways there are sound theoretical justifications for why Spain's asset markets might be suffering at the moment since the ECB after all has been in tightening mode for some time now and it was always a question of time before it began to pinch. Yes, I know that the ECB is confident that future inflation pressures and money supply growth are the things to watch but the real side of the economy is of course going to respond too. In essence, this news is already under great scrutiny in blogland. Macro Man for example also suggests that the ECB's hiking trip might just be about to bite in Spain. He also throws the baton over to Charles Butler from IBEX salad who is bound to be following this closely. Over at Steen Jakobsen's blog the Spanish woes are also on the menu where Steen almost hints to an allegory of the much cherished methaphor of the canary in the coal mine and more generally be sure to watch Roubini and Munchau who are sure to pounce on this as well. Here is Steen Jakobsen ...

I will never ever claim to be expert of anything, let alone Spanish property prices, but to think today's sell-off is random would be to complacent.

So there you have it ... the beginning of the end for the Spanish housing boom? Perhaps not but more generally, the recent slew of data on industrial orders in the Eurozone and EU27 points to a moderate slowdown with a decline of 0.7% in February from January and a stable figure 0.0% for EU27. As always aggregate data on the Eurozone let alone EU27 does not really tell much of a story. So, while we are talking about Spain the figures (new industrial orders) from February extended a three month (m-o-m) decline which began in december. Worryingly, the trend is one of an increase in the decline with -0.2% in december, -1.7% in january, and now -2.1% in february. Even more telling perhaps the y-o-y figure in Spain also points to a possible break in the cycle with a -4.0% decline y-o-y in february on the back of a 11.9% increase y-o-y in january!  In terms of the other (big) Eurozone countries Germany holds up with a hefty 4.0% increase m-o-m in february and a whopping 11.8% increase y-o-y although we need to always think about whether all this capex is channeled into the domestic economy or whether it is going abroad in the form of exports.  Both France and Italy posted m-o-m declines and for Italy's case also y-o-y decline of -3.6% in February. France got 1.4% new orders y-o-y in february.

So, what does all this mean then? Well, the measure of new industrial orders clearly must be considered a forward looking indicator of future capex (i.e. industrial production in this case) and in that light we should not be surprised to see a slowdown in the coming months in terms of capex indicators. Especially Spain needs ardent watching I think but also Italy where consumer confidence slumped to a one year low in April. Of course in Germany capex seems to be thundering along but given the importance of intra-European trade in general there are bound to be important feedback loops here so perhaps Germany will need to wind down too at some point although clearly the fact that orders are being ramped up suggests healthy fundamentals for the forseable future but be sure to watch the trade surplus too.

In terms of a general qualifier on the data presented above note also the recent figures for construction output which paint and overall more positive picture.  

In Summary

Overall fundamentals are still looking good in the Eurozone, way better than I had expected. Italy clearly needs watching on the back of the recent consumer confidence plunge and also Spain where perhaps the ever higher interest rates are beginning to bite. Also generally, Portugal seems to be on a rather depressed road at the moment. On Germany it seems pretty much steady as she goes with sound growth prospects for Q1 and Q2 although I am still fundamentally bearish on the general outlook in 2007. I will however be looking for a surprise on the upside in Q1 GDP figures where my previous forecast was about 0.5% and as such we should be looking at around 0.7% I think especially given the impressive momentum in Germany.