Steven Andrew looks at the data making the news in Euroland
Euroland lead indicators have turned down again, threatening to scupper the economic recovery that never really was. We have been, relatively speaking, ‘bullish’ on Euroland growth for a little while now – based partly on the ‘surely it can’t get much worse’ theory of economic forecasting.
This week’s batch of miserable indicators shows it still can get worse but we still believe there is a huge degree of concentration on the gloom which risks overlooking some of the more positive Euro Area developments that have already taken place and which should continue to contribute to a steady (and very slow by Anglo-Saxon standards) domestic expansion.
Euro low
The main lead indicator of Euroland activity is the German IFO survey. After spending about a year operating within a pretty narrow range – and one which was consistent with a mediocre expansion – the past two months have seen the index decline more meaningfully.
Sentiment towards the growth prospects for Euroland has dipped accordingly, with the euro being the most prominent casualty in recent weeks, tracking back to a seven-month low versus the US dollar of 1.25.
That said, some of this move is likely to be a reflection of the market’s expectations for a ‘non’ vote in the French referendum on the EU constitution. Though in our opinion any such referendum effect will soon be unwound.
For our own part, we need to decide whether the recent downside data surprises are sufficient for us to change our view on the long-held notion that some domestic recovery is likely to endure. For the time being, it is hard to argue that very much has fundamentally changed.
Certainly, the domestic expansion remains fragile but as the French consumer spending data (April up 1 per cent month-on-month and March revised up by 3/10ths) showed, it is still moving forward. And it is worth pointing out that French spending growth has surprised to the upside in five of the past six months.
Unfortunately, for the durability of the recovery, this has been driven mostly by credit and not income growth. On the jobs side of things, the situation is still pretty stationary across the region.
The best that can be said here is that the worst seems to be over in terms of the German real wages drop which troughed at the turn of the year.
Treading water
The bottom line is that the Euro Area recovery continues to tread water. Downside risks have grown, courtesy of more depressed sentiment on the prospects for global growth (and how that might affect Euroland) but we think these downside risks are limited by an external economy that is decelerating rather than collapsing. In our view the most likely out-turn for Euroland in an aggregate sense is a continuation of a very slow-paced recovery.
Key developments
UK housing market data continues to suggest a stabilisation in activity, albeit at a fairly weak level. Mortgage borrowing data released by the British Bankers Association showed a third consecutive monthly increase in mortgage approvals in April (though loans are still down by more than 20 per cent on a year ago). That the housing market has stabilised is also apparent in the monthly RICS survey, which troughed at the turn of the year (on the headline price balance), and in lenders’ house price data which is showing signs of having bottomed (on a 3m/3m basis) in Q1 this year.
Chairman Greenspan in particular renders otherwise turgid matters such as the minutes for policy meetings far more influential than we believe is warranted by their genuine usefulness in telling us about the medium-term. The most recent FOMC minutes illustrate perfectly why this is the case. At the end of March, the Fed was busy revising up its expectation for business investment, noting that the economy had ‘appreciably more forward momentum than previously perceived and inflation pressures could be intensifying.’ Six weeks later, mostly in response to disappointing Q1 data, ‘the [Fed] staff marked down somewhat its forecast of economic growth for 2005 and 2006,’ expecting ‘modest production cutbacks’ thanks to an inventory over-build. As we’ve said before, the Fed watches the data and then calls the economy as it sees it every six weeks. In that sense, the approach is very similar to that of the Bank of England and credits the central bank with the reputation of nimbleness and responsiveness. We should be cautious and not try to read too much into the Fed’s current prognostications or try to divine their implications for markets or the economy over anything other than a period measured in days rather than weeks or months. Our US interest rate view remains that the Fed will stop at 3.50 per cent in August.
Steven Andrew is an economist at F&C Asset Management plc
