August 8, 2008 | posted by Michael Baxter in Eurozone | comments (0) |

For the last year or so, there seemed to be reasons to believe that the Eurozone was set to carry the baton of economic growth in the developed world. After all, with the exception of Spain and Ireland, economies in the region were less reliant on house prices. Furthermore, consumer indebtedness was much lower than in the UK and US.

A criticism aimed at the UK is that we don’t actually produce anything – or at least not much. The UK benefits from a kind of virtual world. Maybe the most important sector of the UK – the City, is jut one massive shuffler of money. Critics of the UK compare this with Germany, that has an economic base you can actually see and touch.

The monuments of British economic success seem to be the Stock Exchange, and the impressive bank head offices in London. The monuments to the German economy seem to be well made, solid cars and workers busy in their overalls.

And yet, all of a sudden, it seems as if the Eurozone could beat both the UK and US into recession.

Yesterday, for example, saw the release of some pretty dismal figures on industrial output in the Eurozone.

Italian industrial production was down by 0.1 per cent, German industrial production rose, but only by 0.2 per cent. To put that in context, production in Germany fell by 1.8 per cent the previous month.

Last week it was told here how Economic Sentiment Indicators (ESI) have fallen dramatically in Germany, France, Spain and Italy.

Earlier this week it was reported that output in Germany may have contracted in the quarter just gone.

Capital Economics reckons the second quarter may well have seen a contraction in Eurozone GDP. It says: “Unless the surveys strengthen markedly in the next few months, there would seem to be a very good chance that euro-zone GDP will contract in Q3 too. With output having risen in Q2 in the US and UK, this would mean that the euro-zone would be the first major economy to enter a technical recession, defined by two consecutive quarters of falling output.”

And in the race to hit recession first, it seems that the Eurozone’s big rival is Japan. Capital Economics reckons the economy of the Rising Sun may well have contracted in Q2 too, although it does expect a pick-up in Japan in Q3.

August 1, 2008 | posted by Michael Baxter in Eurozone | comments (0) |

As you probably know, the baton is supposed to be with the Eurozone now. US and British consumers have run out of puff. The Eurozone is supposed to be out of its wilderness years, and taking off where the US and UK left off, and carrying the torch of growth.

But, instead, the last few weeks have seen the news from Europe get worse and worse. Many economists are now speculating that the region could hit recession, while the US and UK still keep their heads above water.

The last few days have seen two rather nasty pieces of news break in the region of the euro. But at least Germany is still lighting the way forward, and in France a certain amount of reality has finally dawned on the all-too-safe workplace.

One of the key indicators of the Eurozone economy is the Economic Sentiment Indicator (ESI). This is a composite index taking into account confidence amongst consumers, and in the industrial services and construction sector.

July saw this index fall to its lowest level since March 2003. At 89.5, it implies Eurozone growth in the months ahead of just 0.5 per cent.

The index was down across the board, but in Italy it is downright awful.

Yet, while sentiments fall, Eurozone inflation just gets worse.

In July, Eurozone headline inflation hit 4.1 per cent. It had already passed the all-time high a few months back, so from now, on any rise is a new record – and so it was in July.

Alas, the official data does not reveal news on core inflation for a few more days. But what we can say is that up to now, core inflation, that’s with food and energy taken out, has remained modest. So there are no signs then that the rising oil and food prices are creating a spillover effect.

Even so, the European Central Bank has shown itself to be inclined to take a much tougher stance on inflation than the Fed and Bank of England. So, while the fall in confidence indices suggests rates need to fall, it seems unlikely this will happen for a while.

But at least there is good news from Germany, where data out yesterday revealed that unemployment in Germany remained at a 16-year low in July. Unemployment stands at 7.8 per cent.

Last week, the parliament in France finally passed a law to scrap their 35-hour working week. This was, of course, one of the key reforms Mr Sarkozy has been gunning for. The French economy desperately needs reform of the labour market – but it will take some time before this reform impacts upon the economy.

June 6, 2008 | posted by Michael Baxter in Eurozone | comments (1) |

Time was when central bankers used to talk in code.  Alan Greenspan once famously said when giving a talk, “If I have made myself clear, you must have misunderstood me.”  On another occasion he said, “I worry incessantly that I might be too clear.”

It is not like that now.  There’s plain speaking Ben at the Fed, but at the European Central Bank, it appears the president should be named “heart on his sleeve Jean”.

This is what Jean-Claude Trichet said yesterday.  “We considered – it is not excluded – that after having carefully examined the situation, we could decide to move our rates [by] a small amount in our next meeting in order to secure the solid anchoring of inflation expectations, taking into account the situation.”

His heart rendering call for help continued;  “I don’t say it’s certain. I say it’s possible,” he said, all wide eyed, and puzzled.

He went on to talk about a “state of heightened alertness.”

So it seems the euro rate will be going up soon.    Capital Economics said, “But the Bank’s inflation phobia clearly increases the risks of a sharp slowdown in the eurozone economy next year, implying that interest rates may eventually have to fall sharply.”

It does mean that at some point during the next 12 months, eurozone and UK interest rates might converge.   At that point, expect the discussion to begin again about whether Britain should join the euro.

We tackled this controversial topic a few days ago, and one of our readers, Mr Morgan, said, “I’m a little baffled when I see commentators (including yourselves) agonising one day about whether the Bank of England should move our rate by 0.25 per cent, and the next recommending that we have a new currency and move rates by 1 per cent (or more). Some consistency would be nice!”

There are many argument against the euro, but the arguments for are as follows:

For the first time in a quite a while the UK and eurozone economies seem to be converging.

Secondly, the pound has fallen sharply.   The high value of the pound has made it difficult for UK manufacturing to stay competitive.    When financial markets finally restore, London will boom again, and the pound may well go back up.   Sometimes, when one sector is much more successful than others, sector problems can occur.  Economists refer to this as the Dutch problem, when oil exports from Holland pushed the guilder so high, Dutch business lost competitiveness.

By joining the euro when the pound is low, we can effectively lock in the benefit of this, and then, moving forward, expand through exporting, rather than through borrowing.
 

February 1, 2008 | posted by Michael Baxter in Eurozone | comments (0) |

No so long ago, the talk was that the Eurozone needed to take the baton, and propel the economy forward.  Well, all of a sudden, it is as if the region has grabbed the wrong baton – and is instead running with a stick made of lead.

Inflation in the Eurozone has soared to 3.2 per cent – the highest level in 14 years.  More to the point, it appears that core inflation is surging.   

Capital Economics said, “Given probably-neutral energy effects and the favourable base effects of last year’s rise in German VAT, the increase suggests that core inflation may have picked up after being static for the last year or so.”  

Remember, if CPI inflation hits 3.1 per cent in the UK, the Bank of England governor has to write a letter to the chancellor explaining what is going on.  So Eurozone inflation of 3.2 per cent (it was 3.1 per cent last month) is very serious.  

Even more worrying, consumer confidence in the region has fallen -9 to -12.  

But, at least there is good news on unemployment.  Last month, unemployment across the region hit a record low, and then yesterday revealed a sharp fall in German unemployment, which now stands at 8.1 per cent, the lowest level since 1992.  

What is worrying, though, with all this data, is that the Eurozone really could do with a kick-start from reduced interest rates.   This morning, the NIESR predicted growth of just 1.9 per cent this year, with Germany and France only managing 1.8 per cent and Italy 1.4 per cent.   Yet, with inflation so high, it appears that for the time being, the European Central bank can not afford the luxury of a cut in rates.

January 25, 2008 | posted by Michael Baxter in Eurozone | comments (0) |

You may have noticed. A split has emerged in the central banks. While the Fed slashes interest like it was the January sales in banking land, the ECB and Bank of England fret over inflation. At Davos, Jean-Claude Trichet – top man at the European Central bank, said, “There is one needle in our compass, which is price stability.” Earlier in the week, Bank of England governor Mervyn King warned inflation was on the rise.

At the same time, Europeans have been saying the key to solving the global economic problem lies in US consumers saving more and spending less.

Well, yes, that may be true up to a point, but if the US consumer was more frugal, the rest of the world would be a lot worse off. And that’s the problem. Can the world really afford for the US to behave in a more-financially responsible way?

As for Europe, with 3.1 per cent inflation in December, now at the highest level in six years, with German unions growing increasingly restless, with a Spanish consumer boom creating its own property bubble, not to mention an even-higher balance of payments deficit than the one we are afflicted with in the UK, the prospects for Europe are not so good.

Mind you, there is no talk of a European recession, yet. Capital Economics reckons Germany will grow at 1.7 per cent this year and, curiously enough, thinks the Eurozone will grow at exactly the same pace. The star of the Eurozone is expected to be Slovenia, which is expected to expand by 4.5 per cent, but France too is expected to grow at above the recent average, at 2 per cent.

Mind you, a growth of 1.7 per cent in a year when the US and UK are expected to slow sharply may mark the best economic prospects for the developed world this year, but it’s pretty anaemic. If this is Europe helping the global economy avoid recession, and running with the baton, then we had better hope China and India can take the baton on pretty quickly.