Further Signs of a Slowdown?

Just a couple of days ago I reported on how growth in Eurozone manufacturing was probably slowing down in the fourth quarter of 2006. We are admittedly talking about pretty small flucutations in the indexes but still it does seem as if we are slowing down if only moderately. This time we we are looking at the expansion in service industries and as Bloomberg reports also here did we see a slowdown in Decemeber which consequently might be evidence of furhter slowdown in the 4th quarter relative to the 3rd quarter. Once again the fluctuations in the index are pretty small and remember also that anything over 50 indicates an expansion, but still we are not going up here.

Expansion in European service industries, the biggest part of the economy, unexpectedly slowed in December, a sign economic growth may have peaked.

Royal Bank of Scotland Group Plc said its services index, which gauges growth in industries from telecommunications to banking and is based on a survey of purchasing managers by NTC Economics Ltd., fell to 57.2 from 57.6 in November. A reading above 50 indicates expansion. Economists expected the index to remain unchanged.

Economic growth may moderate from the fastest pace in six years after the European Central Bank raised interest rates and as a cooling global economy crimps European exports. Expansion in the manufacturing industry also lost momentum last month.

We also need to look at the different Eurozone countries and here we can see that Germany is going out of 2006 with good pace relative to the other Eurozone countries.

While service-industry growth slowed in Italy and France, it accelerated in Germany, Europe's largest economy, today's report showed.

``The strength of the reading in Germany suggests that the euro-zone economy is in very good shape,'' said Guillaume Menuet, an economist at Merrill Lynch International in London. ``It's very unlikely that we'll experience a significant slowdown this year and that means that interest rates will probably increase.''

All this obviously has investors betting on the Euro as a function of the expection of how the ECB will raise more than the Fed. The question remains though about just how much the infamous fundamentals of a slowing US, a hawkish ECB, and fiscal tightening can be denied.  

Incidentally, the OECD also has a survey out on the Eurozone today which also emphasizes the need for the Eurozone to address its problem ('achilles' heal') of low potential/trend growth. The FT has the important points from the survey ...  

The eurozone economy must reform to address its “Achilles heel” of slow economic growth if it is to capitalise on the benefits of a single currency, the Organisation for Economic Co-Operation and Development said on Thursday.

(...)

On current trends, and with an ageing population, growth in per capita output in the euro area would fall from an annual 1.5 per cent to 0.5 per cent per annum in the 2020s, the report warned.

The OECD said: “Extrapolating the low growth of the past decade is bound to produce a bleak outlook for the future. But it highlights the point that member states will need to take further steps to boost labour supply and productivity growth in order to avoid falling further behind.”

Anyone who at this point has the audacity to argue that demographics don't have anything to do with economics clearly need to think twice. Consequently, it is pretty obvious that any talk about trend growth needs to begin with the actual input to the economy in terms of the labour supply and with the current demographic trend in key member states this component is going to negatively affect trend growth all things equal as we go along. On the other hand we should not be fundamentalists and structural reforms in whatever way we might conceptualize these are also welcome in the sense that their absence also affects the potential growth rate. The real pertinent questions however then becomes what in fact trend growth in the Eurozone is or more specifically how much the trend growth rate in fact differs across member countries? And following from this whether it is in fact plausible to speak of one single neutral interest rate for all member state?