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.
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.
Hardly has the proverbial ink dried on the post above before Bloomberg sends out a new slew of good news on the Eurozone in terms of confidence measures for business and consumer confidence which remained at an all time high actually posting a slight increase.
European business and consumer confidence unexpectedly rose this month to a six-year high, as falling unemployment led to a surge in household sentiment.
An index of sentiment among executives and consumers in the euro region rose to 111.9, the highest since January 2001, from 111.0 in April, the European Commission in Brussels said today. Economists expected the index would remain unchanged, according to the median forecast of 27 economists in a Bloomberg News survey. Inflation remained at 1.9 percent in May, according to a separate report.
The pace of global economic growth and domestic demand is prompting companies to ramp up hiring and investment, pushing unemployment in the 13-nation euro area to a record low. It also is raising concerns at the European Central Bank that inflation may accelerate later this year.
Consumer confidence in France, Europe's third-largest economy, surged in May to the highest on record after unemployment fell and Nicolas Sarkozy used the first weeks of his presidency to push for tax cuts.
Insee, the Paris-based national statistics office, said today its gauge of consumer sentiment jumped to minus 14 from minus 20 in April. That beat minus 19, the median forecast of 18 economists surveyed by Bloomberg, and was the lowest since the agency began issuing the current data in 2003.
France's jobless rate fell to a 24-year low as companies added jobs at the fastest pace in six years, the government said yesterday. Seeking to spur consumer spending, Sarkozy, who took office May 16, has pledged to cut taxes on overtime work and to introduce tax breaks on home purchases.
All this of course primarily underpins the basic economic concept of a business cycle and how an economy does not just go off a cliff from one month to the other. As such, I still think that 2007 will be a most impressive year in terms of average Eurozone performance. The question is how long the pace will be sustained in 2007 and whether in fact not the pace will more modest during the summer. I think so which is also why I don't see the ECB moving beyond 4% of course blatantly going against the general market sentiment which seems to have priced in a hike to 4.25% or perhaps even 4.5%. As always, we will see.