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Monday, March 03, 2008

France Retail PMI and Consumer Confidence February 2008

Well, this week from France we have two different leading indicators - consumer confidence and retail sales - and they seem to be moving in different directions, which is rather strange to say the least.

Perhaps the clearest indication that the French economy may not be holding up as well as it was is to be found in the latest reading for France on the EU Economic Sentiment Indicator. France reported a deterioration in confidence, down to 105.2 in February from 107.0 in January.

Consumer confidence in France also fell to a record low in February as the fastest inflation in 12 years squeezed purchasing power. A gauge of consumer sentiment fell to minus 35, the lowest since the index was introduced in 1987, from minus 34 in January, according to the latest data from Insee, the Paris-based national statistics office.

More than 80 percent of French people said they saw their purchasing power decline in the last 12 months, according to a poll by Paris-based Ifop institute. That is up from 65 percent in November and from 59 percent in January 2007.

The sub component measuring consumers' sentiment about their current standard of living declined to minus 68 from minus 65, the INSEE report showed, while the sub-index evaluating the outlook for living standards rose to minus 42 from minus 44. The personal financial situations component was unchanged at minus 25. The report showed more people may delay big purchases as that component fell to minus 26 from minus 24.

People are evidently worried about rising prices, and President Nicolas Sarkozy, who made purchasing power the centerpiece of his presidential campaign, is facing his lowest popularity rating since he took office in May.

Consumer prices climbed by an annual 3.2 percent in January, according to the European Union-harmonized index, up from 2.8 percent in December and the fastest since the statistics office began reporting the data in 1996.

Food costs jumped 4.2 percent in January, compared with a 3.1 percent increase in the prior month. Meanwhile, oil prices surged to a record above $102 a barrel last week as the dollar fell below $1.50 against the euro for the first time.

Obviously all of this is causing quite a fuss in France, and a study by the Institut National de la Consommation published last week showed French supermarket food prices are rising faster than raw-material costs. The Paris-based consumer group found the biggest price jumps were for baby milk, pasta, ham and yogurt, which climbed between 40 percent and 48 percent in the six weeks to Jan. 9, based on a survey of 1,055 food prices on the Web sites of five of France's biggest chains.

That this uptick in inflation is bound to give all policymakers a major headache was perhaps underlined by the recent admission by French President Nicolas Sarkozy, who has been one of Jean Claude Trichet's strongest critics, that accelerating inflation in France "worries me". So it should do, and especially since it is seriously going to restrict the hands of policymakers over at the ECB.

Prime Minister Francois Fillon said during the week that the French government is investigating food-price increases and suppliers' profit margins, but Insee's consumer report showed consumers are not particularly reassured by government promises or by the firm ECB stance at this point, since they anticipate that inflation may continue to accelerate with the component for price expectations dropping to minus 23 from minus 11.

To some extent these concerns by French consumers are also borne out by the latest data for French producer prices also released by INSEE this week. French producer prices rose 0.5% month-on-month in January, up from a revised 0.1% rise in December. Producer price inflation for December was revised down from 0.2% initially estimated. Producer prices rose more than the 0.4% increase expected for January. On an annual basis, producer prices climbed 4.9% in January, while economists were looking for 4.8% growth.

Industrial producer prices, excluding energy and agri food, were up 0.5%, following a 0.1% fall in December. The annual growth in the index stood at 1.6%. Industrial import prices gained 0.4%, after recording 0.4% fall in December. Over the last year, import prices rose 4.6%. Excluding energy and agri food, import prices increased 0.4% month-on-month and decreased 0.5% from the prior year. What is, I suppose, most disturbing about this whole picture is the way in which some inflation components are accelerating even as the euro continues to reach ever newer highs, which should, in principle, be serving to slow inflation.

Not everything coming out of France this week has been unequivocably bad news though, since the retail sales purchasing managers index shot up in February.

In fact French retail sales advanced the most in 20 months in February, driven by declining unemployment (another piece of positive news) and seasonal discounts, the NTC Economics compiled Bloomberg purchasing managers index showed. The measure of sales climbed to a seasonally adjusted 58.8, the highest since June 2006, up from 56.2 in January, the survey which is based on the responses of 390 retail executives showed at the end of last week. A reading above 50 indicates expansion. Possibly also of note here was that retailers, who stressed that they faced higher purchasing prices, reported declining margins, with this index component decreasing to 48.8 from 50.8 in January. Some of them also reported squeezing prices to attract customers.

But at the end of the day, France's steadily improved employment numbers may well help to continue to underpin consumption to some extent.

German Retail Sales January and PMI February

A number of new data readings have come out from Germany during the last week, and these are leading me to some slight modification of the short term outlook I was painting in my most recent post, although my feeling is that in the mid term little has essentially changed.

It is clear that some slight easing in the downward process is Germany is now taking place, and the recent data are too consistent to ignore on this front. Perhaps the clearest indication of some sort of steadying as she goes can be found in the latest reading for Germany on the EU Economic Sentiment Indicator, with Germany reporting a slight increase in confidence, up to 103.7 in February from 103.1 in January.

The last IFO business sentiment index reading was also not as weak as might have been expected, the GFK consumer confidence reading remained stationary, unemployment continued to fall on a seasonally adjusted basis,and the January retail sales data and February PMI reading indicate an expansion in German retail sales for the first time in several months. Of course how long this will last, and how important the phenomenon will prove to be, is very hard to say at this point. Looking at the general economic environment I wouldn't be betting on any kind of very strong upswing, but the numbers are interesting, and I wouldn't be surprised at all to see some slight recovery in the export situation in January when we get the data. An Eastern Europe effect perhaps? Certainly several economies are still accelerating there, almost to overheating.

Then there is the retail sales data.

According to provisional results released by the Federal Statistical Office turnover in the German retail trade was up by 2.7% in nominal terms and 0.6% in real terms in January 2008 over January 2007. When adjusted for calendar and seasonal variations the January turnover was in 1.9% higher in nominal terms and 1.6% in real terms over December.

Now this is not an earth shattering change, but it is significant. If we add to these results the latest reading on the Bloomberg retail sales purchasing managers index, which rose to 52.1 in Feb from 44.2 in Jan (according to data released yesterday by NTC economics), then obviously we can see that the sales climate has improved somewhat. In fact this was the first time in almost a year that German retailers anticipated that future sales performance would exceed plans, while the retail sales rose for the first time in five months. The last time the retail PMI registered an expansion was in September 2007.

Clearly it is very hard to decide how to read all of this at this point, but I imagine things will become clearer as the days pass. Certainly the general direction of private domestic consumption does little to encourage us to expect that domestic consumption will be able to do much to sustain the current expansion if exports continue to slow, so the export data in the coming months will be crucial, and should tell us a lot about what is actually happening at the present time. Certainly according to Trichet, as reported in Bloomberg this morning, it is - as I tended to suspect - largely an East European driven exports story, and if this is the case we will all need to watch out if there is any sort of major "correction" in Eastern Europe.

Spanish Economy Slowdown Update

Quite a bit of Spain related data has come out over the last few days, including the latest flash estimate for CPI inflation from the INE, which came in at 4.4% for the second month running.

Given that most of the Spanish economy is slowing rapidly this sort of inflation is likely to prove itself to be a real headache, especially over at the ECB. The problem is only added to by the latest reading on the producer price index which was up 6.6% year on year in January, indicating that there is still a lot of inflation momentum in the system.

The European Commission also reported at the end of last week a further steep decline in its eurozone “economic sentiment” indicator for February, with the composite number reaching its lowest level since December 2005. The indicator, which gauges optimism across all economic sectors and is regarded as a good guide to likely future trends, fell to 100.1 points in February from 101.7 in January.

This seems to imply a significant deceleration in activity, although the picture is very variable. France is holding up better than most, and Germany (as explained here) is hanging on in more than I personally expected, but Italy is very much in the doldrums already, and the two "construction driven" eurozone economies (Spain and Ireland) are in strong downward retreat.

The countrywide fall was led by the service sector but the index for Spain, were the impact of a bursting property bubble is in the forefront of everyone's mind, was especially pronounced. With a reading of 87.5 the indicator hit its lowest level since January 1994. Italy’s index also dropped steeply, to the lowest level since August 2005.

One measure of the slowdown in activity is the rate of expansion in industrial output, which has proved rather volatile, but the rate slowed notably during the year, with the year on year changes being neagtive in both November and December.

We also now have the December mortgages data, and as was to be expected, both the value and the number of new mortgages was down. The average value of the new mortgages created in December was 161,142 euros and this was down by 1.9% on December 2006, although it was 1.4% higher than the equivalent number for November 2007. For housing mortgages alone the average amount was 143,739 euros, 0.2% more than in December 2006, and 2.2% less than in November. Even more significantly the number of new mortgages in December (102,976) was down 26.87% on November and 14.6% on December 2006. As a result of the reduced numbers of properties being newly mortgaged the total value of mortgage loans (16.59 billion euros) was
down 25.88% on November and 16.24% on December 2006.

Finally we have what Wolfgang Munchau calls in his weekend op-ed in the Financial Times his favourite current chart (although why anyone would call such an appaulingly depressing picture a favourite is beyond me) - the one from the Bank of Spain which shows how building approvals and permits have (and I quote him) "fallen off the edge of a cliff since the end of 2006".

As Munchau points out, at their peak in March 2007, house building permits were rising at an annual growth rate of 25 per cent. In the autumn of 2007, their annual change had dropped into the region of minus 20 per cent. The situation in terms of approved starts is even more dramatic, since these rose at an annual growth rate of close to 28 per cent in March 2007. By September the annual rate of change had fallen to minus 66 per cent. House prices have not fallen significantly in Spain yet, but this is surely only a matter of time, and especially when we come think about the large stock of unsold new homes (estimated at 500,000 as of March 2008) waiting on the books, and the drop in the number of mortgage loans mentioned earlier in this post.

Munchau correctly ties the capital inflows which have taken place to finance the previous boom with the huge balance of payments surplus Spain currently runs (Spain needs in the region of 9 billion euros in external finance a month to keep this afloat), but I'm not sure he has yet appreciated what a problem for the Spanish banking and indeed whole eurosystem this financing problem can become, since while he correctly points out that in the Spanish case "there can be no currency crisis....since Spain does not have its own currency", he omits to ask himself the equally pertinet question as to whether or not there could be a banking crisis. As I try to argue in this post there most certainly can.