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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 “we had a sensationally good first quarter, we will have a bad second quarter”.   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 “Slowdown 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 prices” 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: ‘economic expectation’s are down to -52.7 from 22.3 and  ‘current conditions’  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.  Friday’s 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 metrics.



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 system.


 Europe 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.


 European energy 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.

Joseph Trevisani
FX Solutions, LLC
Chief Market Analyst

[email protected]

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