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Monday, September 25, 2006

The Eurozone Is Slowing

Despite all the apparent optimism you can find round and about, the Eurozone is in fact slowing, the latest industrial output data from France seem to make this abundantly clear. What I find hard to understand is how so many people can have been wrong-footed on this. Claus Vistesen has a useful review of the arguments on the blogs, and New Economist has also been suitably cautious, but the rest seem to have missed the big picture. (Just as they have done with Japan really).

The worst offenders are definitely over at Morgan Stanley. Steven Roach leads the way, but Eric Chaney isn't far behind. And Brad Setser - and in particular his guest poster Charles Gottlieb of the Center for European Policy Studies (CEPS also seems to be way off target here) - seems to have fallen hook line and sinker.

Are we all putting our credibility on the line here gentlemen?

French Business Confidence Falls After Output Drops

French business confidence fell in September from a five-year high it reached in July, after industrial output declined.

Insee's index of sentiment among 2,000 manufacturers in Europe's third-largest economy dropped to 107 from 109 in July, the national statistics office said today in Paris. Economists expected the index to fall to 108, according to the median of 22 estimates in a Bloomberg News survey.

``This summer hasn't been that good, and things aren't as exuberant as they were in the first quarter,'' said Laurence Boone, a Paris-based economist with Barclays Capital. ``As we go towards the autumn, confidence is weakening.''

France's economy, which expanded at the fastest pace since 2001 in the second quarter, may be cooling as the cost of oil and the euro's gain against the dollar threaten purchasing power and exports. There already are signs growth in Europe has peaked after the European Central Bank raised its key interest rate four times since early December. Slower U.S. growth may also damp demand.

``According to entrepreneurs, past business has slowed down in the manufacturing sector,'' the report said, with orders from abroad thinning. Executives from the car industry remain the most pessimistic, the survey showed, after automobile production fell 1.4 percent in July.

French industrial production unexpectedly fell for a second month in July as manufacturing of cars and electronic equipment slumped, adding to evidence that economic growth may slow.

Incidentally, this Bloomberg piece is another classic example of how to get it wrong:

Europe, Japan Wean Themselves From Dependence on U.S. Consumers

Europe, Japan and emerging economies around the world are weaning themselves from dependence on the American consumer, and economists say it's just in time.

Demand in the world's largest economy is slowing as the U.S. housing market falters, a development that the International Monetary Fund on Sept. 14 called a key risk to global expansion. If so, it's a risk that the biggest exporting nations are better prepared to weather now than five years ago.

``Domestic demand in so many other parts of the world is picking up,'' says Jim O'Neill, head of global economic research at Goldman Sachs Group Inc. in London. ``If there ever was a good time for the U.S. to slow, this is it.''

Wishful thinking is not a substitute for sound economic analysis.


brad said...

I am not sure I have ever opined on 07 eurozone growth. I tend to think that the tax hike in germany will slow things down a bit. i have argued that from the end of 04 to mid 06, europe accelerated on the back of a surge in domestic demand/ housing froth -- the eurozone current account certainly plunged into a deficit and Europe emerged as the key contributor to Chinese export growth.

but, for what it is worth, the pace of deterioration in europe's current account balance does seem to have slowed, and its import boom seems to be tapering off a bit. the available data doesn't include any data points after oil fell either, so it is an oil thing.

Admin said...

Hi Brad,

Nice of you to drop by, as you can see it's kind of quiet over here :).

"I am not sure I have ever opined on 07 eurozone growth."

OK, well on the letter of the law point I accept. But then again I never mention 2007. And it was this sentence that caught my eye.

"Both Morgan Stanley (at least Eric Chaney) and JP Morgan (in their latest global outlook) now recognize that Europe has emerged as an important engine of global demand growth."

This seems to have some implication for up and coming growth. You seem to accept this story, and basically I think it is way off target. I think we are now at a very interesting juncture, and a lot of things should become much clearer over the next twelve months.

Incidentally, the expression 'demand growth' is riling me a bit. I mean if we mean consumer demand growth then I think that needs specifying, since there is obviously investment demand, and it is this in the developing world that is pulling consumer demand (indirectly) in Japan and Germany. That is why I say the global economy has now some spanking new engines. My feeling is that the global train is just about to pull into a siding and while they fill the water tanks the head engines are about to be switched.