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Wednesday, October 03, 2007

Mortgages In Spain

Looking at the way thinks are shaping up in Spain, and at the same time living here, I am obviously going to follow this one close up now.

I have been looking in the statistics office site for data on mortgages, but unfortunately the most recent we have at this point are July. Since the data we really need are for September, this means we won't really know the full extent of the initial hit on Spain till early December. Nonetheless some indication can be obtained by looking at what was happening before things seized up.

If we look first and the number of mortgages made each month.

Now if we look at the value of these mortgages in millions of euro.

What we can see is that the property market in Spain really peaked towards the end of 2006. The market hit a bottom in April, but there was a rebound in May (offers from property promotors?). But the rebound was not sustained and then the market again resumed the downward march. All we need to know now is the extent of the damage in September, and how low can we go. I am not optimistic. This is with us for some timne to come, and will probably be - proportionately - much more important that what is happening now in the United States.

Building Activity in Greece

I'm trying to get a measure on the extent of the construction slowdown in Greece and its likely impact on the general level of economic activity in Greece. Building permits conceded give one indication. The latest data we have is from June. Looking at the chart, the slowdown from the middle of last year is clear enough.

The year on year growth graph also says it all I think.

We don't have too many other measures for Greece at this point, but the Greek Statistical Office do use cement output as a proxy for the level of construction, and a glass at the volumes used does tell its own story.

Even though in June and July there was a recovery from the lower level of earlier in the year (when remember the government deficit reduction was affecting civil engineering projects and the interest rate tightening at the ECB new home starts), the level is way down across the board from a year earlier, as can be seen clearly from the year on year chart.

And remember all of this is pre the sub-prime turbulence in August, since the latest month we have any kind of data here for in July.

Italian and German Services Slow Markedly in September

European service industries grew at the weakest pace in two years in September after a jump in credit costs hurt banks.Royal Bank of Scotland Group Plc said today its services index fell to 54.2, the lowest since August 2005, from 58 in August. The index is based on a survey of purchasing managers by NTC Economics Ltd. and a reading above 50 indicates expansion. The figure is above a Sept. 21 estimate of 54.

Italian services hit a level of 53.9:

But perhaps most shocking of all is the decrease in the rate of expansion in German services, which dropped from a level of 59.8 in August to one of 53.1 in September.

Spanish September Consumer Confidence Plummets

While it should be obvious to anyone that the most of the national economies in the Eurozone are slowing rapidly, and have been in the Italian and German cases since early summer, this downturn will present some new features. In particular the former "stellar economies" - Spain, Ireland and Greece - may be the worst affected due to their heavy dependence of construction activity for obtaining growth, and due to the dramatic nature of the downturn since mid-August in the property sectors of those countries.

Up to now the data in this regard has been rather anecdotal, like the big drop in cement output in Greece, but today we have a first real data reading (retail sales etc data for the relevant period will still be a little while arriving) in the shape of the Spanish Consumer Confidence Index. Over to Bloomberg:

Consumer confidence in Spain declined to a record low in September after the fallout from the U.S. subprime-mortgage slump pushed up borrowing costs worldwide.

The Official Credit Institute's index of consumer sentiment dropped to 80.2 from 86.5 in August, the institute said today on its Web site. That is the lowest reading in a series that started in 2004.

The cost of inter-bank loans jumped in August after European lenders disclosed losses in the U.S. mortgage market. That pushed up payments for Spanish homeowners who have variable-rate loans tied to the 12-month interbank lending rate for the euro region.

``Spain is heading for a marked slowdown and by mid-2008 we expect it to be growing at decidedly below-trend rates,'' Dominic Bryant, an economist at BNP Paribas SA in London, said in an e-mailed note.

The 12-month Euribor rate jumped to 72 basis points above the European Central Bank's benchmark interest rate this month, twice the average spread since the debut of the euro. In Spain, 95 percent of home loans have variable interest rates.

Here's the chart:

and here's the chart for the sub-components:

What can be seen from this chart is that all the components reached a peak this summer in April and May, in June and July they were all down, but only to the level of February/March, then from July onwards the whole thing starts to subside, and who knows if we have touched bottom yet, since all the forward indicators are a bit more positive, but my feeling is that that is rather an indication of the fact that people still don't appreciate the gravity of what is happening. It hasn't sunk in yet, and people are still expecting the housing market to pick up in a quite unexpected fashion. Spain could face a hard landing. If things continue to move at this speed it will get one.

Also service activity in Spain, which accounts for some 60 percent of the economy, posted its slowest expansion in almost two years in September, according to a separate survey of executives by NTC economics. The index fell to 52.4 from 53.5 in August.

A similar picture can be seen in the manufacturing PMI, although manufacturing accounts for a much smaller part of total economic activity in Spain than in some other European economies.

In the case of manufacturing, the rate of expansion has been slowing since June, although some reduction of activity is normal in the summer. It is the September reading which should give cause for concern here.

At the present time we are simply talking about a slowdown in the rate of expansion, but how far is this now away from an actual contraction. Not very, I would say.

Tuesday, October 02, 2007

German Retail Sales Continue To Fall

The data for August retail sales for Germany were released by the Federal Statistics Office at the end of last week:

WIESBADEN – According to provisional results of the Federal Statistical Office, turnover in retail trade in Germanyin August 2007 was in nominal terms 1.2% and in real terms 2.2% smaller than that of the corresponding month of the previous year. The number of days open for sale was 27 in August 2007 and 27 in August 2006, too.

When adjusted for calendar and seasonal variations (CENSUS-X-12-ARIMA), the August turnover was in nominal terms 1.1% and in real terms 1.4% smaller than that of the preceding month.

Compared with the corresponding period of the previous year, retail turnover was in the first eight months 2007 in nominal terms 0.9% and in real terms 1.6% smaller than that in the first eight months of 2006.

Here's a chart of the monthly index since January 2006:

And here are the monthly year on year changes.

Incidentally, I really don't see how anyone could have been so silly as to argue that a 3% increase in the VAT consumption tax would have no impact on domestic demand, the effect is evident even to the naked eye, isn't it?

Uncoupling and Turkey's August Trade Deficit

What follows is a brief research note on the latest monthly trade data from Turkey. (Anyone interested in a more in-depth analysis of recent developments in the Turkish economy can try my post The Anatolian Tiger, for Global Economy Matters, 9 September 2007).

The coupling-uncoupling issue is a complex one. In many ways there are clear signs that some parts of the global economy are more coupled than ever before. To take one case in point, Japan. As Richard Katz noted, Japan can hardly be said to have uncoupled from the United States economy given that, since 2001, there has been a 77 per cent correlation between Japanese GDP growth and the level of exports in the previous quarter. Indeed, during the years between 2000-2007, the correlation between GDP growth in the US and Japan was 74 per cent. On the other hand, and changing continents adroitly, Serhan Cevik informs us that that the equivalent correlation for Turkey was 71 per cent, and this close relationship exists in the data despite the fact that only 5% of Turkey's exports actually end up in the US.

The key to understanding this mysterious Turkey-US "coupling" undoubtedly passes through the Eurozone, and in particular through Germany, which is, in its turn, very dependent on exports for achieving economic growth. So it is with this focus in mind that I am going to take a quick look at the latest trade data from Turkey.

According to provisional data from the Turkish Statistical Office Turkish exports grew in August 2007 by 27.7% (year on year) and reached a value of 8,698 million Dollars. At the same time imports grew by 22.2% reaching 15,006 million Dollars. The foreign trade deficit for August thus increased by 15.4% over August 2006, rising from 5,465 million Dollars to 6,308 million Dollars.

The weight of the EU in Turkish Exports remains important. Over the January-August 2007 period, and when compared with the same period of the previous year, exports to the EU were 37,960 Million Dollars - or up by 25.9%. The proportion of the EU countries in total exports was 56.6%.

In August 2007, the main export partner was Germany with 1,044 million Dollars, an increase of 41.9% over August 2006. So Turkey is evr more dependent in this business cycle on Germany for export growth while Germany is dependent on both the US and Eastern Europe for both export growth and GDP growth. (The principal driver of Turkish growth is not at this point exports but rather domestic demand and investment).

Germany was followed in importance by the UK (699 Million Dollars), Russia (423 Million Dollars), France (417 Million Dollars), Italy (414 Million Dollars) and the USA (343 Million Dollars).

For August 2007, the top country for Turkey’s imports was Russia (2,059 Million Dollars) reflecting Turkey's dependence on imported energy, while imports from other countries range from Germany (1,857 Million Dollars), to China (1,289 Million Dollars), to Italy (879 Million Dollars) and the USA (812 Million Dollars).

For the period January-August 2007, road vehicles and components had the highest value share in exports at 9,940 million Dollars, followed by iron and steel (5,762 million Dollars), machinery, mechanical appliances, boilers, equipment and parts 5,619 million Dollars) and articles of apparel and clothing accessories (5,314 million Dollars).

Over the same period, the top categories for imports were mineral fuels and mineral oils (20.401 million Dollars) followed by machinery, mechanical appliances, boilers, equipments and parts (14,145 million Dollars) and ıron and steel (10,518 million Dollars).

What we can see from all of this is that, at least in foreign trade terms, Turkey is very dependent on the EU, and in particular on Germany and the EU 10. Since Germany is itself very dependent for growth on exports to the US and the EU 10, we can expect any slowdown in that mechanism to find a reflection in the level of economic activity in Turkey.