Tuesday July 15, 2008 - 20:13:55 GMT
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Recession European Style
European leaders are nervous. Peer Steinbrueck, the German Finance minister
said âwe had a sensationally good first quarter, we will have a bad second
quarterâ. The German first quarter was
exceptional, 1.5% in quarter to quarter GDP growth, more than double the
Eurozone result of 0.7%. Christine
Lagarde the French Finance Minister
noted âSlowdown in growth is definitely a concern we
need to look very seriously at with a view to try to stimulate growth while at
the same time trying to stabilize pricesâ French GDP was strong in the first
quarter at 0.6% but is expected to falter in the second quarter.
Eurozone business and consumer sentiment figures peaked at
about the same time as those in the United States, early summer last
year. Since then the EMU Economic
Sentiment Index has fallen from 111.9 in May 2007 to 94.9 this past June. Consumer confidence has dropped from -1 last
May to -17 in June; industry confidence has declined to -5 in June from 7 last
April. Similar results have come from the ZEW Survey of EMU attitudes:
âeconomic expectationâs are down to -52.7 from 22.3 and âcurrent conditionsâ now read 7.9, a little more than a year ago
it was in the eighties. PMI readings for
manufacturing and services show similar declines and in June both dropped below
the 50 expansion-- contractions line.
In the United
States the changes in sentiment and outlook
have been exacerbated by the burden of the sub prime, banking and credit
problems. Fridayâs IndyMac Bank takeover
by the FDIC was caused by public fear for the safety of deposits. It was an old
fashioned bank run, but it is an ominous sign when such a run takes place in
the full public knowledge of FDIC guarantees. The fear of financial system
failure is a tremendous drag on an American recovery.
These crises have depressed economic activity in the US far more
than the ebbing sentiment and outlook numbers would have done had they been
part of a normal business cycle. The
effect of these problems was almost instantaneous last year as GDP skidded from
4.9% annualized it in the third quarter to 0.6% in the fourth.
The first run at EMU second quarter GDP is not issued until
August 14th. US
second quarter GDP is issued two weeks earlier on July 31st. The will be plenty of time to ponder the
Eurozone economic future before the statistics provide confirmation.
Market focus will now shift to the Eurozone. In the weeks before GDP is out we will have a new reading on ZEW economic
expectations and current conditions, industrial new orders, services and manufacturing PMI, EMU industry and consumer confidence and retail trade.
European figures have been declining for almost a year. The chance is
very good that these new numbers will show much a deeper fall in all European
The effect of the gathering European problems has so far
been minimal on the euro. For almost a year now the focus has been on the US, with most
of the drama, bad news and worry coming from the American economy and financial
has escaped most of the problems from sub prime crisis, at least in the sense
that the public concern over those issues has depressed economic activity. Europe also has its well know social net which cushions
and draws out the effect of economic troubles.
In the US
the response of consumers and business is faster and more pronounced. Even
though the consumer and business outlook in the US
did not turn profoundly south until the new year, US economic activity took an
immediate hit in the fourth quarter.
With European consumer and business indicators now at similar levels to
where they are in the US,
one can expect the European economies to soon follow suit.
No social net, not
even the extensive European variety can support a fading economy for ever. And
then there is inflation and the price of energy. Though energy inflation is
somewhat mitigated in the Eurozone (perhaps 10 percent) by the rise in the euro
against the dollar, energy prices must begin to bite on the continent for
consumers and business.
prices are more expensive than the US due to higher taxes. European
incomes are lower than in the US.
The ability of Europeans to absorb skyrocketing energy prices is no better than
in the US
and in fact may be worse. The marginal
effect on economic activity of expensive energy in the Eurozone may well be
greater than in the US.
If European governments are concerned abut the prospects for
growth perhaps it is time for the currency market to take note. Poor or
negative European growth figures are not priced into the euro. When they arrive
the adjustment will be swift.
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