EMU Economic Indicators Preview

(Week of 25 to 31 August 2008)

• German ifo business climate (August): stabilized
• German adjusted unemployment (August): unchanged at best
• M3 growth (July): slowed to 9% yoy
• EMU industrial confidence and economic sentiment (August): stabilized
• EMU inflation (August) flash estimate: unchanged at 4.0 % yoy

In August, the German ifo business climate index could have stabilized. The US ISM manufacturing index has deteriorated slightly. The German yield spread has also done so recently, as long-term interest rates have gone down, while short-term rates have remained stable. However, the German ZEW economic sentiment has improved, the euro has depreciated, the crude oil price has fallen and the DAX performance index has recovered somewhat.

The GfK German consumer confidence for September could have stabilized too, due to the marked price decreases for heating oil and gasoline since the middle of July. The same applies to Italian consumer confidence, EMU industrial confidence and economic sentiment in August, which had plummeted twice unexpectedly. As usual, there are no French business and consumer confidence indicators in August.

German adjusted unemployment might have remained unchanged at best in August, after having fallen by 20k in July. The favourable labour market development has come to an end, because the German economy could already be in a technical recession: the ifo business climate's downward trend has intensified, and new orders have fallen for seven consecutive months. The adjusted unemployment rate might have remained at 7.8%. The harmonised EMU unemployment rate could have remained unchanged at best at 7.3% in July.

Destatis will publish the detailed breakdown of the components of Q2 German GDP. We are not expecting any substantial revision of the overall GDP figures of the flash estimate two weeks ago. According to the information given together with the flash estimate, net exports had a favourable impact on overall GDP, with imports declining more than exports. On the other hand, private consumption and investment in buildings were a drag on GDP growth. Changes in inventories probably weighed on growth as well, whereas investment in machinery and equipment could have remained more or less unchanged.

Monetary expansion is likely to have slowed further. Although we expect flows into time deposits to have remained strong, other components of M3 (e.g. overnight and saving deposits, money market funds) are only growing moderately, if at all. Therefore, M3 growth is likely to have decreased to about 9.0% yoy in July, down from 9.5 % in June. According to the latest Bank Lending Survey, credit standards have been tightened and demand for loans is weakening. As consumer confidence is low and housing markets have deteriorated in several eurozone countries, households are holding back on house purchases. Corporate demand is also falling, mainly because of a reduction in fixed investment and a decline in M&A activities. Overall, we expect credit growth ("loans to other euro area residents") to have slowed from 9.9 to 9.4% yoy in July.

On Wednesday, all the German Länder are expected to publish regional CPI data for August. Subsequently, the preliminary results for national German CPI in August will be released. We expect German consumer prices to have decreased by 0.2% mom, which would bring the annual rate down slightly to 3.2%. The negative monthly rate will have been mainly due to marked price decreases for heating oil and gasoline as from mid-July. This could have dampened monthly inflation by up to 0.3 percentage points. On the other hand, many utilities announced higher prices for gas as from August. As the summer holidays have now ended in most of the regional states, prices for accommodation services and package tours could have decreased slightly. Food prices could have remained more or less stable.

The Eurostat flash estimate is likely to show that euro area inflation has remained at 4.0% yoy in August. This would correspond with a monthly rate of 0.0% in unadjusted terms. As with the German data, decreasing oil prices are expected to have had a significantly dampening effect on monthly inflation.

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