German IFO Index October 2007 Falls Again

Well we are still with the sentiment indexes at the moment, but real data is surely not too far behind now. As was only to be expected, German business confidence fell more than most economists forecast in September, reaching a 19-month low, on concern the strength of the euro and increasing cost of credit will sap economic growth.

The Ifo sentiment index, based on responses from 7,000 executives, dropped to 104.2 from 105.8 in August, the research institute said in Munich today.




Obviously we peaked back in the spring, and have been on our way down ever since.

Last's weeks ZEW index was broadly similar in its generalised pessimism on the immediate outlook:



The euro's climb to a record $1.4130 is obviously putting a break on German exports heading outside the EU, and in particular after the U.S. housing slump has so badly roiled financial markets.

Forecasts for growth next year are now tumbling down all over the place. The Cologne-based IW institute yesterday substantially cut its growth forecast for the German economy for next year, predicting growth will slow to 1.9 percent next year from 2.5 percent in 2007. It previously forecast a 2008 expansion of 2.2 percent. Even the European Commission is begining to accept reality, and on Sept. 11 trimmed its 2007 forecast for the 13-nation euro region ever so slightly to 2.5 percent from 2.6 percent. Doubtless there will be more to come from this source.

Japan Exports September 2007

Japan's exports grew at the slowest pace in two years in September as shipments to the U.S. dropped back. In total exports rose 6.5 percent from a year earlier, according to data from the Japanese Finance Ministry released earlier today. At the same time imports declined for the first time in more than three years, helping the trade surplus widen to yet another record.



Shipments to China, the rest of Asia and Europe, however, remained reasonably firm, and this is important given the fact that exports constitute the main engine of the growth for the Japanese economy. Growth in exports to China slowed somewhat, down to an annual 16.5 percent last month from and annual 23.7 percent in August. Asian exports increased at an 8.3 percent rate after climbing by 16.4 percent in August. Shipments to Europe rose 13.2 percent in September after August's 15.5 percent gain.



Now the situation is slighly deceptive given that a significant part of the exports to China, the tigers and emerging Asia (ASEAN) consists of components which will be processed and then re-shipped elsewhere (principally Europe and the US), but still, there is obviously some element of "rebalancing" going on, and it will be interesting to monitor this as we move forward. The vitality of Japanese exports to the EU is hardly surprising given the relative values of the yen and the euro, but it would be interesting to check just how exports to the EU are growing from Singapore, Hong Kong, Taiwan and South Korea (the position vis-a-vis China is already pretty well known I think).



Exports to the US fell 9.2 per cent from a year earlier, and this was the biggest drop since November 2003, a factor which raises fears that subprime problems were taking a toll on Japan’s major export destination. The main component in the fall in US-bound exports was auto shipments, which fell 15.2 per cent from a year earlier. Construction machinery for housing also fell significantly.

Imports fell 3.2 percent in September, the first drop since February 2004, as oil costs declined 12.4 percent from September 2006. In so doing they confounded a consensus forecast for a 2 per cent increase. As a result, the trade surplus expanded by 62.7 per cent to a record Y1,640bn ($14.3 bn), compared with economists’ median forecast for a 47.1 per cent rise to Y1,500bn.



Japan needs export growth if the economy is to rebound from its second-quarter contraction as falling wages keep the lid on spending by consumers at home. Japan’s economy in fact contracted 0.3 per cent in April-June largely as a result of a slump in capital spending, so it will be very interesting to see whether Japan is able to turn this situation around in the July-September quarter, and if it does manage to do this, just how it manages to do so.

Eurozone Industrial Orders

As I said in the last post, little by little we are now going to start getting eurozone data. Today Eurostat released the August new industrial orders data.

According to the report:

The euro area1 (EA13) industrial new orders index2 rose by 0.3% in August 2007 compared with July 2007. The index fell by 2.6% in July3. EU271 new orders increased by 1.0% in August 2007, after a decrease of 3.5% in July. In August 2007 compared with August 2006, industrial new orders increased by 5.1% in the euro area and by 8.2% in the EU27.

In August 2007, among the Member States for which data are available, total manufacturing working on orders rose in seventeen and fell in three. The highest increases were registered in Poland (+81.6%), Hungary (+33.3%) and Lithuania (+28.2%), and the only decreases in Denmark (-18.4%), Italy (-1.8%) and the Netherlands (-0.4%).

What stands out here is the clear difference between Western and Eastern Europe. Eastern Europe is still accelerating - overheating considerably some would say - while Western Europe is slowing visibly.

Among the eurozone countries which are most notably slowing at the moment I would single out Italy, Germany, Greece and Spain for rather close attention. Germany and Italy have long had their growth ups and downs, which have in the last decade been more downs than ups, but Greece and Spain (two of the three construction boom countries, the other being Ireland) have normally maintained a fairly strong profile through the downturns, and this has tended to take some of the edge of the recent weak periods. This time it may well be different, since the construction driven economies may well be even more affected than the "usual suspects", something which makes this downturn an even more problematic one.

Now if we look at the evolution in orders in recent months, we can see that everyone has been slowing to some extent (less growth, rather than outright contractions) and the German case particularly stands out for the much lower rate of expansion in new orders following the very good period earlier in the year.





If we look at the month on month changes, I would single out just how evidently Spain has been slowing, and the strong underlying weakness which is being revealed in Greece.




The general German picture is only confirmed if we look at the data released today from the Federal Statistics Office which shows that building activity in Germany decreased 4.4% in real terms in August 2007 when compared with August 2006.

As reported by the Federal Statistical Office, the total price-adjusted value of orders received by building construction and civil and underground engineering enterprises in Germany decreased 4.4% in real terms in August 2007 from the same month of the previous year. In building construction demand slumped 7.6%, in civil and underground engineering it fell 1.3%. The number of employees amounted to 713,000 at the end of August 2007. That was a decrease of 28,000 (–3.8%) compared with August 2006.

This situation is clear enough if we look at the chart for German construction activity since the end of last year, using the Eurostat monthly data which only runs to July (ie to before the "financial turmoil" of August). The slowdown from the previous boom is clear enough. Now it only remains to be seen how far it goes.

Italian Consumer Confidence Index October 2007

Well the real data that everyone has been waiting for on the eurozone is about to come rolling in, but just to keep us occupied in the meantime, we have another sentiment indexto look at, this time it is the Italian Consumer Confidence one.

Italian consumer confidence in October was unchanged from September as higher energy prices and signs of slowing economic growth weighed on optimism. The Rome-based Isae Institute's index, based on a poll of 2,000 households, held at 107.3, the same as last month.



It's hard to know what to make of this reading at this point. As I have often said I don't think we can eak too much pleasure or pain out of any one single data reading. The index level is, of course, still well down on the highs registered earlier in the year, and most of the real economic indicators are on their way down, with the exception of unemployment, of course, but I have already addressed this apparent anomaly here.