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Monday, July 28, 2008

German Consumer Confidence Slides Raising Eurozone Recession Fears

by Edward Hugh: Barcelona

German consumer confidence dropped to the lowest in more than five years entering August as the sharp rise in energy and food prices continued to weaken purchasing power and the economic outlook continued to deteriorate. The GfK forward looking consumer confidence index for August declined to 2.1, its lowest level since June 2003 (and down from a revised 3.6 in July).

The sub-index measuring income expectations decreased to minus 20 from minus 7.2, while the consumers' propensity to spend component fell to minus 26.2 from minus 23.7. Economic expectations dropped to minus 8 from 7.5.

Along with fears of high inflation, many Germans are concerned that there will be a more marked cooling of the economy than previously anticipated. News from the USA of the continuing gloom in the financial markets support these assumptions and not least, the continuing high value of the euro represents a hazard to exports.
GFK's August Report

This is only the latest in a series of readings from the German economy which indicate a sharp slowdown may well now be underway (I analysed in some detail the reasons why we might expect this in my recent What Is The Recession Risk For The German Economy? article on the Roubini European EconMonitor). In a sense, given the high level of export dependence, and the complete lack of buoyancy in domestic consumption, this is exactly what we should expect to see as key export markets slow. The German Finance Ministry have already warned of a significant contraction in German GDP in the second quarter, and the signs now seem to be growing that German GDP may also contract in Q3, in which case the German economy may already be in recession.

The Ifo institute's German business confidence index dropped 3.7 points in July (to 97.5) when compared with May. This is its lowest level in three years, and the biggest one month drop since the fall which followed the 11 September attacks. Meanwhile manufacturing and services across the euro area contracted for a second month in July according to the latest PMI flash estimate, with the reading sliding more sharply than expected in July to 47.8 points from 49.3. This was well below expectations which had been for a decline to 48.7, and it was in fact the lowest reading since November 2001.

German exports declined the most in almost four years in May, as a slowdown in some key eurozone economies (Spain, Italy) and a stronger euro curbed demand. Sales abroad, adjusted for working days and seasonal changes, decreased 3.2 percent from April. That's the biggest drop since June 2004.

German industrial production declined for a third consecutive month in May. Seasonal and inflation adjusted output was down 2.4 percent from April, when it fell 0.2 percent. That is the largest month on month fall since February 1999. Output was up 0.8 percenton May 2007, on a working day adjusted basis.

Record oil and food prices pushed inflation in Germany to 3.4 percent last month, squeezing disposable incomes just as the euro's gains and a slowing global economy coupled with problems in some key eurozone economies like Spain and Italy curbed the demand for exports.

It appears that the rate of inflation is initially stagnating around the three percent mark. This means that consumers are watching any pleasing increase in their purchasing power generated by the significant wage and salary increases in some industries being steadily demolished by inflation. Even the positive effects on income of a buoyant job market are negated by price increases and so relegated to the background for the moment.
GFK's August Report

In addition German producer prices rose at their fastest pace in 26 years in June, adding to pressure on the European Central Bank to keep interest rates high even as economic growth slows. Producer prices increased by 6.7 percent from a year earlier, the most since March 1982, after rising an annual 6 percent in May.

All of Europe's largest economies have been showing signs of slowing since the end of the first quarter. In Italy, business confidence slipped to its weakest since October 2001, according to the Isae Institute index. Spanish consumer confidence is at all time lows, while in France business confidence fell to the lowest in more than three years in July. The UK is now slowing very rapidly on the back of a credit crunch induced slowdown in the housing market.

The possibility that we may see a eurozone wide contraction in the second quarter is now a real one, and if Germany continues to contract in Q3 (as well as Spain and Italy: Spain is already in recession IMHO) then we may even see a whole zone contraction in the third quarter, giving the zone what will effectively be the first recession in its short history. Certainly the flash PMI reading for the whole eurozone manufacturing sector (which fell from 49.2 points in June to 47.5 in July) suggests that a Q3 contraction is now a real possibility. With both manufacturing and services indicators well below the 50-mark separating expansion from contraction this certainly constitutes an unequivocal recession warning. To be watched, and closely, in my considered opinion.