EMU Economic Indicators Preview

(Week of 30 June to 6 July 2008)

• The flash estimate for June could show EMU inflation increasing to 3.9 % yoy
• German adjusted unemployment could have fallen by 20k in June
• German industrial new orders might have remained unchanged in May
• German retail sales could have remained stable in May
• ECB set to raise refi rate to 4.25%

The Eurostat flash estimate is likely to show that euro area inflation has accelerated to a new record of 3.9% yoy in June. This would correspond with a monthly increase of 0.3% in unadjusted terms. As in Germany, the monthly inflation rate will have been mainly due to record high crude oil prices. Prices for accommodation services and package tours might also have increased, whereas clothing prices could have gone down. Food prices could have remained more or less stable. As the national inflation rates for June available so far have been higher than expected, the flash estimate could be even higher.

German adjusted unemployment rose slightly by 4k in May. The first increase since March 2006 does not indicate a turnaround on the labour market, however, but was mainly due to seasonal effects: the spring upswing on the labour market was more subdued than usual, because unemployment in outdoor jobs had not gone up markedly during the relatively warm winter months. Adjusted unemployment might have fallen by about 20k again in June, as GDP growth accelerated in the first quarter. The unemployment rate would remain at 7.9% for the fourth consecutive month. The harmonised EMU unemployment rate could have remained unchanged at 7.1% in May.

German industrial new orders probably remained more or less stable in May, as the correlated climate indicators had recovered temporarily. German retail sales might have remained unchanged in May too, after having decreased twice in a row and because retailers' business assessment had recovered significantly. However, consumer confidence had deteriorated. The RBS purchasing managers' indices for the German and the EMU manufacturing sector for June are not likely to be revised significantly.

The ECB Council will meet on Thursday to discuss monetary policy. Having prepared markets for a rate hike at the meeting in early-June, the ECB is now likely to raise its refinancing rate by 25 bp to 4.25%. Even after such a decision, ECB President Trichet is likely to stress the upside risks to the outlook for inflation, as inflation rates in June seem to have exceeded forecasts and the oil price is still rising. However, in the light of recent business and consumer surveys, the outlook for growth has also changed for the worse. Additionally, the latest statistics indicate that loans to non-financial corporations - the most important contributor to credit growth until recently - might have started to slow. Against this background, the ECB is likely to reduce its “degree of alertness” to some form of vigilance or monitoring.

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