Â·German GDP could
plunge by around 4% in the first quarter
Bank embarks on quantitative easing measures
to stop the franc appreciating
Â·Forint and other
eastern European currencies stage a recovery
Things can always get worse
euro has strengthened significantly this week, gaining over two US cents to
well over 1.29. This was not so much the result of a fundamental improvement in the currency
itself, quite the contrary in fact: in view of the current economic data, particularly
those from Germany,
we are revising our 2009 growth forecasts for Germany
and the eurozone down sharply. Last week, the ECB governing council appeared to
have reached a more realistic assessment of the economic risks, but this week
brought contradictory signals from some representatives. At any rate, there
seems to be a strong faction in the council which is of the opinion that the
ECBâ€™s scope is virtually exhausted. The euro, however, was boosted primarily by
the equity market recovery, the Swiss National Bankâ€™s intervention and the fact
that financial markets in eastern Europe have calmed down.
EMU: GDP collapse is accelerating
German foreign trade and industrial production figures show that the slump in economic activity
in the first quarter has intensified. If industrial production were to remain
at the January level
for the rest of the quarter (which is by no means certain), production would
plunge by over 11%
compared with the previous quarter. In Q4, the drop in production was â€śonlyâ€ť
6.6%. Foreign mtrade
is following the same pattern; in Q1, exportsâ€™ contribution fell by well over
10%. In January,
industrial new orders from abroad were about 19% below the average for the
fourth quarter. Against this backdrop, real GDP could decline by around 4%
quarter on quarter (not in annualised
terms!), after a 2.1% drop in the fourth quarter. Even if the economy were to
pick up again later in the year, economic activity could still drop by an
annual average of around 7%. This reflects just how capital goods oriented and
heavily reliant on exports the German economy is.
downward revision for Germany
will drag EMU growth down by about one percentage
Furthermore, downward revisions seem to be on the cards in other European
countries too. In January, French industrial production fell by 3.1%
month-on-month, and was thus 5% below the
average for the fourth quarter. On Friday, BdF president Christian Noyer stated
that growth in
Q1 would turn out to be worse than the Banque de France had been expecting up
to now. To put it briefly: the growth prospects in the eurozone appear to be a
lot gloomier than the ECB had projected a week ago.
SNB: bold action against deflation
in the footsteps of the Fed, the Bank of Japan and the Bank of England, the
Swiss National Bank has now embarked on quantitative easing. Due to the
deflation risks and the increase in capital market risk premia which is
hampering the transmission of monetary policy stimuli, the SNB lowered the
three-month Libor target range from 0.50 to 0.25%. As rates for one-week refinancing
operations have been 0.05% since December as it is, the classical methods of
influencing the money market are more or less exhausted. The SNB has therefore
announced, that it will increase liquidity substantially in order to bring the
three-month rate down to the target rate. To this end, it will engage in
additional repo operations, buy Swiss franc bonds issued by private sector
borrowers and purchase foreign currency.
the Fed, the SNB is now also trying to exert direct influence on financing
conditions for private sector borrowers by buying private bonds on the open
market. The foreign exchange dimension is peculiar to Switzerland,
however. The SNB states explicitly that it wants to prevent the Swiss franc
from appreciating further against the euro. The SNB has now actually confirmed
that, immediately after the monetary policy decision had been announced, it had
intervened in the currency market to weaken the franc. Subsequently, EUR-CHF
rose from 1.48 to 1.53.
positive side-effect of the Swiss measures is that they helped to calm down
eastern European financial markets. Some eastern European countries are in a
sticky situation mainly because of extensive foreign currency-denominated
financing. Loans in Swiss francs were particularly in demand because of the low
interest rates. SNB rate cuts and measures to prevent the franc from appreciating
thus also reduce financial market risks in eastern Europe.
the beginning of this week, the Hungarian National Bank has been issuing
official statements and also, reportedly, intervening in the forex market, in
an attempt to strengthen the forint. The measures implemented by the SNB gave
the Hungarian National Bankâ€™s efforts an additional boost, thus enabling the
forint to firm significantly. EUR-HUF fell from 316 at the end of last week to
around 295 currently.
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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