EMU Economic Indicators Preview

(Week of 12 to 18 January 2009)

• German GDP 2008: still high, but weakening
• EMU industrial production (November): down
• EMU HICP (December): likely to be confirmed at 1.6%
• ECB could cut refi rate to 2.00%

In 2008, German GDP will probably have increased by 1.5% year-on- year at best. On 14 January, Destatis (the German Federal Statistical Office) is issuing its first preliminary estimate of German GDP for the whole of 2008. Q4 2008 GDP will be published officially on 13 February, together with revisions of the previous quarters' data. A detailed breakdown of the quarterly components will follow on 25 February.

However, on 14 January Destatis is likely to indicate that quarter-on-quarter growth was not as negative in Q3 as earlier data had suggested, but reached a record low in Q4. Destatis will also publish its preliminary estimate of the German Maastricht deficit-to-GDP ratio for 2008. We are expecting this to be relatively small - about 0.1%. This year, the deficit will be much higher due to the deep recession and the effect of the automatic stabilisers, the burden of the financial crisis and the costs of the economic stimulus packages.

Italian and EMU industrial production will probably have continued decreasing in November, because all correlated climate indicators deteriorated. The EMU trade balance is likely to have deteriorated too, like the corresponding German figure.

Final HICP inflation in the eurozone will probably be confirmed at 1.6% in December, which would correspond with a monthly inflation rate of -0.1%. The average inflation rate in 2008 would therefore be 3.3%. In the current year, we expect inflation to be far below the threshold of 2% on average. German consumer price inflation in December is likely to be confirmed at 0.3% mom and 1.1% yoy. But it is also possible that both rates will have been revised upwards slightly. Thus, the price index would have increased by 2.6% on average last year.

Economic activity appears to be turning out much worse than expected by the ECB only a few weeks ago. Moreover, inflation rates in the eurozone have fallen drastically over the last months, reaching 1.6 % in December and heading even lower in 2009. This gives the European Central Bank scope to cut interest rates again on Thursday, despite some relatively hawkish comments from council members in December. In our view, a rate cut by 50bp to 2.00% - in line with market expectations - is the most likely outcome. However, the ECB is likely to dampen more aggressive rate cut expectations.

BHF-BANK
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