EMU Economic Indicators Preview

(Week of 1 to 7 December 2008)

• ECB: scope for sashing interest rates
• German retail sales (October): unchanged
• German industrial new orders (October): up slightly

After plummeting in September, German industrial new orders are likely to have recovered in October, despite the fact that all correlated climate indicators dropped. German retail sales probably remained unchanged in October, as retailers' business assessment improved and consumer confidence deteriorated. We do not expect any significant revisions for the final PMI indices for November, nor for EMU GDP in Q3 2008.

The gloomy economic outlook is putting commodity prices under sustained pressure. As a result, inflation rates in the eurozone have already fallen drastically in November, from 3.2 to 2.1%. The average annual inflation projection for 2009 and 2010 could even be below the ECB's target rate of just under 2%. This gives the European Central Bank considerable scope to cut interest rates on Thursday, especially as the impact of the credit crisis on monetary aggregates seems to be increasing. Lending to private households, for example, has dropped. We are expecting the ECB governing council to take advantage of this scope and to cut its refi rate by at least 75, or possibly even 100, basis points.

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