Losing Steam in the Eurozone?

A couple of days ago I asked whether in fact we were bumping against the roof for growth in the Eurozone invoking the recent stagnation in industrial confidence surveys. Interestingly, consumer confidence in the Eurozone's biggest economy Germany held up very well with a notable increase. Yet, the recent data of the real side of the economy in the Eurozone suggests that we indeed are bumping against what could be an end to a very impressive spurt. Of course, the Eurozone economy on an aggregate basis won't cave in from one month to the other and in 2007 I think it is fair to assume the growth in the +2% area will prevail, perhaps even nudging up towards 2.5%. First off, we consequently had a decline in private consumption for manufactured goods in France. This needs however to be seen in the light of the fact that domestic demand in France remains an engine for growth in the economy and thus also in the Eurozone since France after all represents Germany's biggest export market. This last bit is important I think since there are still those who think that everyone can be like Germany living off of external competitiviness without really asking the question of why and how Germany and France differ in the first place?

More generally on the data side an overall index of Eurozone retail sales showed a pretty steep decline in April both from a month earlier and on a y-o-y basis. The same image presents itself in Italy where both business confidence and retail sales dropped in May. A second indicator which points to an easing off of momentum in the Eurozone is the figure for mortgage lending which is extending its decline. For example in Spain, mortgage signings for houses declined 1.9% in March from February as well as the average amount mortgaged declined 8.8% in March from February. This of course showed itself in the aggregate money supply (the M3) which is one of the ECB's weapons of choice in terms of gauging future inflation. Yet at a 10.4% increase in April it is still well above the target but I guess we should also ask the question of just how much of an indicator the M3 really is in terms of inflation measured by the HCPI index. 

In Summary   

While I don't think this is the beginning of a big downsloping rollercoaster ride in the Eurozone it is consistent with my views that real economic data could potentially surprise on the downside relative to the general positive commentaries and outlooks. The reasons for this prediction have not changed and still boil down to three things; a slowing US, fiscal tightening in key economies, and a vigilant ECB. As I have also noted before I would pay special attention to Italy where GDP growth in Q1 07 amounted to a puny 0.2% well below the Eurozone average. Having said all this, the ECB is without a shred of doubt raising to 4% and futures markets linked to bond yields also seem to have priced in an increase to 4.25%. I am not certain and as before I remain my stance that real economic data very well might incite the ECB to hold at 4% which in this case holds equal that the Fed holds.