Nudging Against the Roof in the Eurozone?
I wouldn't dare to spin the recent news on business confidence in the Eurozone as decidedly bearish. After all the aggregate Eurozone economy seems very healthy on a relative basis here in the beginning in 2007, and by relative I mean something like compared to the growth rates in a post 2000 period. Yet, there are however signs that we might just be hitting the ceiling for optimism gauges with the recent business confidence survey in the three biggest economies, Italy, France and Germany. The FT has a well informed article on the aggregate data ...
(from the FT)
Business confidence in the 13-country eurozone, which has soared over the past year, shows signs of peaking, with Germany reporting unchanged levels of optimism while France and Italy saw declines.
Germany’s closely-watched Ifo business climate index remained unchanged at 108.6 in May – only a whisker lower than the 108.7 record set in December last year, the Munich-based Ifo institute reported. Italian business confidence fell from April’s six-year high, while France also saw a correction after three consecutive monthly gains.
The usual suspects are invoked as culprits, an appreciating Euro and a slowdown in the US where the former of course also ties to a tightening ECB. Meanwhile, the Eur/Usd remains volatile around the 1.35ish band dropping today on updeat data from the US on home sales and durable goods orders. So, don't expect this to deter the ECB where I am confident that it will take a more pronounced effect from the real side of the economy to make the central bank stray off its tightening course. As such, the ECB still retains it much cherished vigilance against inflation. It does however suggest perhaps (just perhaps) that the ECB will be going to think twice about moving beyond 4% in 2007. On the other hand there seems to be a general consensus amongst the high lords that inflation should be something to worry about. Recently, the OECD for example noted that central banks, with the notable exception of Japan, should raise rates in 2007 to curb inflation.
Nothing much happended yesterday as measures noted above showed that business confidence had halted. Yet today with consumer confidence rising in Germany the Euro rose against the Yen on expectations that the interest differential will widen (even more) between the BOJ and the ECB. Also bonds in Europe reacted nudging up yields to reflect the increase in expectations of more than one hike in 2007 something which was also reflected in a rise in German import prices mainly on energy of course which once again begs the question of just what inflation measure all those central banks scurrying around should worry about?
I have only some brief comments here. The first concerns the confidence readings which we should remember are just that; confidence readings. What really matters is the real contribution of, in this case, consumer spending in Germany. Of course, a rising confidence denotes more spending which in Germany's case is only natural since unemployment is falling to reflect byouant hiring and activity in the capex sectors which again is driven to a large exten by export. And at least in theory the ECB is right when it comes to wage pressures. I mean, all those workers will want to see their income increased as the party in the global economy just keeps thundering along. What I am worried about (as virtually everyone else) is that we are at the very end of a cycle where the ECB as the only major central bank (and the BOE) is bend hell on raising rates. I mean, the economy actually slowed in Q1 2007, remember? There is a qualifier here however and that has to do with China, India, and Brazil where we should expect growth to remain high albeit in China with its blistering pace not least in equity markets we will perhaps soon stand before a correction to echo the maestro's recent remarks. But at this point it is anybody's guess really. All this global growth is good for Germany and Japan where exports represent the main engines of growth and it is in this ligth that I am keenly interested in seeing just how much internal demand will contribute with here in a period where it seems that economic activity in many ways are peaking.