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Friday, January 11, 2008

Czech Republic To Hold Fire On Euro Membership

Monetary policy experts in the Czech Republic are having second thoughts about the advisability of adopting the euro in the near future, based presumeably on the experience of those who have gone for rapid euro convergence. According to central bank board member Robert Holmanhe the Czech Republic is "not ready" to adopt the euro because giving up the koruna could cause the economy to overheat, (he has obviously been looking over his shoulder at what has been happening in the Baltics, Bulgaria, Romania etc).

The koruna's appreciation against the euro has lifted prices near the level of those in countries that have been European Union members longer, Holman wrote in a commentary in Mlada Fronta Dnes newspaper today. Losing the ability to allow the the koruna to appreciate would be reflected in a quickening pace of inflation, he said. This may not be exactly the situation, but he is scratching in the right area, and loss of control over monetary policy - as we are seeing now in the cases of Ireland and Spain - can create special "overheating" problems, which when corrected may produce a mini boom-bust type cycle.

``We would have to live with European interest rates that would undoubtedly be too low with regard to higher domestic inflation,'' Holman said in the article. ``Our economy would overheat, which could have fatal consequences.''

This is basically what appears to have happened in the cases of Ireland and Spain with their domestic housing booms based on long periods of negative real interest rates. Holman said that once the Czech Republic enters the so-called exchange-rate mechanism - which basically offers a pre-entry test of currency stability before the switch, a commitment will have to be made to limit the koruna gains, and this could well lead to an acceleration in price growth which would not be appropriate to the low interest environment. I think Holman has a strong point here, and I think it is one which did not receive sufficient thought before Spain and Ireland were admitted - since they were always liable to have a lengthy period of rapid catch-up growth where a rising currency would have been more appropriate.

"A country that is only going through a process of real economic convergence with the euro zone cannot fulfill the low- inflation and currency-stability criteria at the same time,'' Holman wrote. He also added that once the Czech Republic gives up its own currency all ``economic shocks'' will be transmitted to unemployment and inflation. "That is not a good alternative for our employees and consumers....It's better to have a domestic currency with a flexible exchange rate."

Of course we could call this learning by doing, but I would say better late than never. For a day by day insight into the kind of mess that can result from not heeding Holman's warning can be found by following events on this blog about Spain, and starting particularly with this post.

The Czech koruna rose to a record against the euro for a second consecutive day yesterday as investors bet the central bank will raise the European Union's lowest interest rates to stem accelerating inflation.

The koruna, the best emerging-market performer this year, gained versus 14 of the 17 most-traded currencies as a report yesterday showed Czech inflation accelerated to 5.4 percent in December, exceeding the central bank's target for a second month. Policy makers now seem set to lift the key benchmark rate at some point in the not too distant future, possibly in February.

Annual inflation last month accelerated to the fastest since August 2001.

The koruna was also underpinned by a larger-than-expected trade surplus, which widened in November from the previous month as imports grew at the slowest pace in 19 months. The surplus was at 11.3 billion koruna ($641 million) compared with 8.6 billion koruna in October, according to the statistics office data released today.

Inflation In Russia and Ukraine

The inflation bonfire just burns and burns, across a group of countries originating in the Baltics, passing through Bulgaria and Romania, then on up via Poland and the Ukraine to Russia. As I say in my last post, the only real doubt is whether or not this is some sort of geometric progression which extends itself all the way out to China. This will be the big question we should get answered in 2008.

Essentially the Baltics have been the "canaries in the coal mine", giving us an early warning signal about what was about to happen.

And the common factor here? Well try looking at the underlying long term fertility in all these countries in the context of their need to close the income gap, as Claus Vistesen explains in this extensive post here, and as I try to explain in this post on Russia, and this one on Ukraine. People have long been telling us that the demographic dividend was far from mechanical, but few took the trouble to think about what actually happened if you missed getting it altogether.


Russia's inflation rate rose in 2007 to the highest in four years in December as the government proved unable to put a brake on food prices and wages even while investment soars. The rate for the year rose to 11.9 percent from 9 percent in 2006, the first time that the rate has surpassed the previous year since 1998, the Moscow-based Federal Statistics Service Rosstat said today. Consumer prices rose 1.1percent in December, compared with a 1.2 percent advance in November.

Russia, the world's biggest energy exporter, has struggled to curb inflation as record oil income has boosted salaries and global food prices have increased. In an attempt to try to stop the upward march of food prices the government cut dairy and vegetable oil import duties, sold grain from state reserves and added a grain export duty. A number of companies even agreed in October to freeze prices on some milk, vegetable oil, egg and bread products until Jan. 31.

Food prices rose a monthly 1.6 percent, compared with 1.9 percent in November. Food price growth was led by fruit and vegetable prices, which slowed from November's rate of 6.2 percent to 5.6 in December, according to the statistics service.

The Organization for Economic Cooperation and Development said in a December report that the Russian government's ``massive additional spending'' before elections also helped push up inflation.

Legislators approved additional budget outlays this year as the nation prepared to hold parliamentary elections on Dec. 2 and a presidential vote in March 2008.


Ukraine's annual inflation rate accelerated to 16.6 percent in December, the fastest since 2000, on rising prices of food and fuel, the state statistics committee reported late yesterday. Ukraine's inflation rate surged from 15.2 percent in November, which was the highest in Europe for that month. Food costs increased 23.7 percent in December from a year earlier. Consumer prices rose 2.1 percent from the previous month.

Really I have very little more to say on all this that hasn't already been said in this post (or in this much longer and fuller attempt at diagnosing the Ukranian issue). Prime Minister Yulia Timoshenko said at a Cabinet meeting in Kiev that ``The government should approve a plan of anti- inflationary measures.'' But this is just the point, since at this stage noone is very clear what can be done about all this, as inflation moves from one Eastern European country to another like a stack of dry timber catching fire.

Chile's Central Bank Raises Interest Rates, What Happens Next?

Well this is all about to get very interesting indeed, as Ben Bernanke indicates the Fed's willingness to cut interest rates agressivley to try and skirt the recession danger. Meanwhile some central banks in more or less solid developing countries - Chile, Brazil, Thailand, Turkey, India, even Argentina - are under pressure to raise rates, and hence can find themselves facing the "kiwi effect" as more money flows in to fuel the inflation the central bank is trying to contain. My feeling is that the underlying conditions in the above mentioned economies are sufficiently strong to withstand this pressure, and as a result what we will see is very rapid "glosing of the dollar value of GDP" gap in these countries. Eastern Europe, Russia and possibly even China (China is where I have the graetest doubt) will probably be a very different story.

But today it is the turn of Chile, as the central bank raised its benchmark lending rate to the highest in six years as it seeks to curb the fastest inflation in a decade. Policy makers raised the benchmark rate a quarter point to 6.25 percent in a meeting yesterday.The bank acted in response to inflation that climbed to an annual rate of 7.8 percent in December, driven by higher costs for food and transportation. The question is, with the US Fed set to lower rates rapidly, will this move curb inflation, or attract funds which can only serve to accelerate it. With the Peso set to rise, dollar denominated loans are going to look increasingly attractive to Chilean clients?

Yesterday's was the second consecutive monthly increase as the bank tries to bring inflation down to its target for two years from now: 3 percent plus or minus 1 percentage point. The bank's overnight lending rate has risen from a low of 1.75 percent in the first eight months of 2004.

December's inflation was a ``significant surprise,'' the central bank said after the meeting. ``Further additional adjustments may be necessary to guarantee that inflation converges with the target rate.''

The Chilean peso rose to its highest level versus the dollar since 1999 today on expectations the central bank would lift rates while the U.S. Federal Open Markets Committee cuts.

Chile's economy grew 4.6 percent in November from a year earlier. It is the only Latin American country to have closed its income gap with the U.S. since 1990, as surging demand for the country's exports has stoked expansion, Finance Minister Andres Velasco told El Diario Financiero last week.

The difference between own currency GDP growth rates, and dollar denominated growth rates can be seen clearly in the two charts that follow. IMHO it is this fundamental currency rebalancing that is driving a lot of the action in some emerging economies at the present time.

Thursday, January 10, 2008

As German Exports Wane, Is Reform Fatigue Arriving?

The German economy is now clearly losing momentum as a stronger euro makes exports less competitive and near-record oil prices drive up inflation, leaving households with less money to spend. Exports, when adjusted for working days and seasonal swings, slid 0.5 percent from October the Federal Statistics Office in Wiesbaden said today. Anyone who can't figure out what the chart below is saying needs economic literacy classes, IMHO.

Retail sales in November also dropped 1.3 percent. More importantly ..."as shown by estimates of the Federal Statistical Office (Destatis), the 2007 nominal retail turnover in Germany is expected to be between 0.7% and 1.0% smaller than in 2006."

Also industrial production fell 0.9 percent in November from October, the Economy Ministry in Berlin said today. Equally importantly construction output was down 1.6 percent from October.

Entering Reform Fatigue?

One of the thing which strikes me about all those false hopes for a sustained recovery that people are forever being offered in Germany and Japan is the corrosive effect that this can have on the psychology of all the ordinary people who are on the receiving end.

What Claus and I have been noticing is just how hard it is for people to take seriously the idea that there may be a long term underlying problem in these countries associated with years of very low fertility and population ageing. In both countries now, after years of hard and difficult reforms - what the Economist calls "cultural changes" - people may be less ready to receive yet another dose, and will quite possibly be willing to try different ideas and other formulas. Some indication of this is to be seen in the recent defaut of the LDP in the Japanese Upper House elections and the early departure of Abe.

So enter another argument. Consumption is weak because wages and salaries are too low. Companies in Germany and Japan have lots of profits,while what they don't have are wages, and hence internal consumption. To some extent, of course, this is the case. The question is why.If wages are trending downward in Italy, Japan and Germany as aggregate population age rises there may be some productivity and human capital related explanation for this, as I explain in my recent extensive study on the German labour market.

So it may be that - as the Financial Times reports this morning - we see some serious attempt in the short term to raise wages.

"German government and union officials gather on Thursday in the baroque town of Potsdam outside Berlin to start wage negotiations for the country's 1.3m civil servants, kicking off what the head of the country's largest trade union predicted would be a year of "mega-wage deals". After years of wage stagnation in Europe's biggest economy, calls for substantial pay increases are growing louder – and prompting warnings from economists about the potential impact on jobs and inflation."

Such an attempt to increase the wages share in German National Income in not supported by productivity and value chain shifts will, unfortunately, do more harm than good by slowing down the pace of job creation, and pushing up inflation in the short term. Since this will be unsustainable, as the economy slows the danger can then very rapidly shift from inflation to deflation. There are now no easy "instant coffee" policy solutions available to the underlying problem in Germany. The first step in begining to make the best of a bad job would be to recognise that what is happening actually is happening. Reading the majority of commentators at this point I fear we are still a long way from that recognition, so it seems things will continue to get worse before there is any chance of them getting better. I emphasise, the most important step towards begining to do what can be done now in Germany passes through a general recognition of the problem being faced. Without this there is little hope of real progress.

Conclusion, Have We Been Here Before?

To close, just a couple more graphs. We can see from the most recent export y-o-y chart that export growth is now slowing significantly, and that we are now entering the downward phase of the whole cycle. We have, of course, been here before, after the collapse of the internet boom.

It may be worth reminding ourselves at this point what ectually happened last time round, ie the last time the acceleration in the Y-o-Y growth rates in German exports effectively stalled. That was back in early 2000, as we can see from the chart below. And what happened at that next? Well the fed was easing as the US entered recession, and the euro was to some extent rising, both of which put a strong break on German exports. And after export growth collapsed, German GDP growth wasn't far behind. So it isn't the rise in the currency alone that matters, you have to think about the whole environment which produces it. Why your currency is rising, while someone else's is falling. And of course, in German export terms, after the rise comes the fall. This is the cost of not being able to depend on your own internal demand, you have to depend on someone else's demand.

Secondly, we should also think about what happens to employment creation and unemployment as GDP growth stalls. The chart below offers a comparison of movements in the two main unemployment indicators for Germany - the ILO comparable one, and the national German one - from the early 1990s to date. As can be seen the stall in GDP growth produced the rapid rise in umeployment after the summer of 2000, as win-win became lose-lose. I don't see why the picture shoud be that different this time round. The ageing population component in the slowdown will - if anything - be worse this time (the median age is higher). The labour market arguments are outlined in much more depth in this post.

Tuesday, January 08, 2008

EU Commission Eurozone Economic Sentiment Index December 2007

Evidence of a growing slowdown in the Eurozone economies continues to show up across the board. German retail sales, for example, fell for the third consecutive month in December according to the Bloomberg purchasing managers retail sales index released at the end of December. The index came in at a seasonally adjusted value of 44, compared with 43.6 in November. A reading below 50 indicates contraction. Retail sales as measured by the PMI also fell across the entire 13 nations euro bloc in December, with sales falling in France for a third consecutive month (the December index came in at 49.1), while a Italian sales dropped to 44.7 from 45.3.

This general impression is confirmed by the latest release today from Eurostat, which shows European retail sales fell the most in at least 10 years in November (the latest month for which they have released data) as rising food and energy continue to hit the consumer's wallet. Retail sales declined 1.4 percent from a year earlier, and this is the biggest drop since at least 1997. Sales also fell 0.5 percent from November, which was the third decline in four months.

The purchasing managers index for the euro zone manufacturing sector also eased up in December to a give a final reading of 52.6, down slightly from 52.8 in November. The December figure was revised up slightly from the earlier flash reading of 52.5. The manufacturing PMI for the whole zone managed to remain above the October low of 51.5, but the December reading is nonetheless the second weakest figure since Aug 2005.

EU Commission Confidence Index Down All Round.

The general picture of an economic slowdown in the eurozone is once more highlighted by yesterday's realease of the December data for the EU Commission Eurozone Economic Sentiment Index.

The Commission’s economic sentiment indicator is on a clear downward path. At 104.7 in December, down from 104.8 in November, the index was at its lowest since March 2006.

But perhaps more important than the steady downward drift in the general indicator are the individual country differences.

As can be seen, the all important German economy is slowing steadily, although not as fast as some. Part of the reason for this may be the unusual performance of the German labour market. This is a pretty complex matter, and I feel that simplistic interpretations may be sending some analysts straight up the garden path here. I have a long (beware, I mean very long) post studying this problem here, and I will publish some summary results on this blog in due course.

Italy, as I have outlined in greater depth here, has been steadily drifting off towards its next recession since the middle of 2007, but the big news of the moment is what is happening in Spain and Ireland, since as is well known they were the two countries in the eurozone to be most affected by the "housing fever" boom, and if you look at the chart above the correction in these countries since September is striking in its velocity. As the FT comments:

Spain is demonstrating that prospects could vary significantly across the eurozone. Since September, confidence in the Spanish construction sector has tumbled, and the Commission’s survey results showed sentiment deteriorated in December in Spanish industry, retailing and among consumers as well.

I have two very extensive posts on the Spanish situation on my Spain blog (here and here) and I will post a summary here in due course.

But not everything in the Eurozone is bad news at the moment. Take France, for example.

And Yet France Resists!

As the above chart illustrates, France is slowing, but it is not slowing as fast as the rest of the group, and so we may hope that it is the French economy which can do some of the heavy lifting to sustain the eurozone economies in future quarters, since this downturn is going to be an especially difficult one given that the normally boyant Spanish economy will be in the sick ward along with the customary Italian and German patients. This view may surprise some readers, since it is not normal to speak postively about France at the same time as mentioning Germany as a downside element, but then facts are facts and not mere opinion, and this is a moment when all the narratives about how things actually work are going to be well and truly tested, and I fear that "goldilocks" opinions like those currently being advanced by Morgan Stanley's Elga Bartsch are going to be found severely wanting (especially her German powerhouse argument, presented in her xmas "Pulling a Slow Train" post which you can find here. In that post she actually says - and I quote directly - "Germany could well be on the way to becoming the new growth locomotive in Europe. The phase of underperformance in terms of GDP growth, which has plagued Europe’s largest economy for years, is clearly over." As I say, I think this is to misunderstand what ha sbeen happening in Germany, and what the macro issues which present themselves there really are, but in any event we are all going to get to see soon enough).

Basically there are strong demographic grounds for imagining that France (just like the United States) is not in as bad a shape economically as some imagine (as Claus spelt out in this post back in early 2007, where he explains why France is not, in economic terms, "the sick man of Europe") despite having severe institutional deficiencies and a very poorly functioning labour market. Some call all of this an example of my demographic "tunnel vision", but the nice thing about economics is that theories are testable - if you accept the judgement of the data - so I would simply ask the skeptics to bear the argument in mind and follow the data as we move forward.

In fact French Gross Domestic Product grew by 0.8% , in the third quarter of 2007according to revised estimates from the French statistics office Insee published last week. One of points which stood out in this data was the strong performance of domestic consumption -a d here France differs considerably from both Germany and Italy - with household expenditure rising by 0.8% ( following 0.6% growth in the second quarter of 2007). This surge in domestic consumption contributed 0.4 percentage points to quarterly GDP growth. General government expenditure slowed from a 0.5% y-o-y rate in Q2 to 0.4% and thus only contributed 0.1 percentage point to Q3 GDP growth.

Total Gross Fixed Capital Formation (GFCF) grew at an annual 0.6% rate (0.4% in the previous quarter). The GFCF of households grew by 0.6%. In total GFCF contributed 0.2percentage points to GDP growth. Exports growth also increased (1.5% following 0.7% in the previous quarter), while imports grew more slowly, by 1.0% (after 1.8% growth in Q2), so that changes in net foreign trade contributed +0.1 point to GDP growth (after being a -0.3 points drag in Q2). Inventory changes did not contribute to GDP growth (after +0.1 point in the preceding quarter).

A glance at the long term annual growth chart for the French economy gives some indication of why I am so confident that France will weather the storm better.

Despite the fact that France - just like everyone else - gets recessions, there is much more soliditity and regularity in the growth, and the trend is much higher than that to be seen in Italy, for example.

And when we come to Germany, even though the line is not as negative as it is in Italy, a clear downward movement in trend growth can be observed. But please observe the bounce-back after 2002, and especially the sharp upspike after the begining of 2006. That is what all the debate is about. Is this trend sustainable? Demographics says it isn't. Conventional analysts like Elga Bartsch say it is. Now we are going to see who is right, and hopefully modify and calibrate our models accordingly.

Strong Points and Weak Points in France Looking Forward

Euro zone purchasing managers surveys for the manufacturing sector also tend to confirm the idea that the economy of most eurozone member states has been slowing in the fourth quarter despite what seem to be pockets of resistance in some countries.

The purchasing managers index for the euro zone manufacturing sector eased to a final 52.6 in December from 52.8 in November. The December figure was revised up slightly from the provisional reading of 52.5. The manufacturing PMI for the whole zone has managed to remain above the October low of 51.5, but the December reading is still the second weakest figure since Aug 2005.

As suggested above, country level PMI surveys are giving the impression that national growth disparities within the euro area may be widening. France, for example, continues to resist the general downward trend in manufacturing with the French manufacturing PMI staging a small rally and climbing to 53.8 in December from 52.5 in November.

Nonetheless Q4 may not be so positive as the third quarter was. As already noted, retail sales dropped in France in Novermber for the third month in succession according to the PMI, with the December index coming in at 49.1,

However French consumer confidence in unexpectedly dropped to a 19-month low in December. Consumer sentiment fell to minus 29 from minus 28 in November,according to Insee, the Paris-based national statistics office. The December reading is the lowest since May 2006.

So nothing is perfect. France will note the slowdown. My argument is simply that it will note it much less than some of the others. As far as I acn see at present, Spain and Ireland may well be the first ones formally into recession, closely followed by Italy, with Germany holding out just a little bit longer, and only really dropping in the wake of events in Eastern Europe, on which her exports are heavily dependent. Basically, to orient yourself here, it is important to understand that the eurozone countries are enetering the present recession with all the key policy indicators acting as headwinds (the precise opposite of the situation in the US. The ECB are stubbornly sticking to "inflation vigilance" (while the Fed is giving greater emphasis to providing a platform under the economy and easing), inflation is biting into consumer purchasing power (ditto the US in this case), the euro is at very high levels which presents problems for exports and sucks in imports (both of which are negative for GDP, and the US dollar is of course falling, making exports more competitive and acting as a brake on imports), and at the same time the 3 month euro libor, despite some recent reduction, remains stubbornly high, making it more difficult for banks to sustain liquidity and hence more reluctant to lend (again, the Fed has been somewhat more successful in easing 3 month interbank rates. So there it is I'm afraid, downwards we go with a big push from the available policy instruments.

Monday, January 07, 2008

Romanian Central Bank Raises Rates Again

Romania's central bank raised its benchmark interest rate today for the second consecutive time after inflation accelerated more than previously expected. The central bank increased its Monetary Policy rate to 8 percent from 7.5 percent.

At the last monetary policy board meeting on Oct. 31, the central bank raised its main interest rate to 7.5 percent from 7 percent after cutting it four times earlier in the year. The benchmark rate was 8.75 percent when Romania joined the EU in January, the highest among the 27 members. The bank cut the rate at the first of its four monetary policy meetings in 2007, citing slowing inflation - which fell to a 17-year low of 3.7 percent in March - and a strengthening leu.

``The short-term inflation outlook has worsened in the context of heightened macroeconomic risks, especially those related to the income policy and higher public spending in the run-up to forthcoming elections,'' The bank also cited ``a possible significant deterioration of inflation expectations.''
Central Bank Statement

The Bucharest-based National Bank of Romania had already accepted that it would miss its year-end 2007 inflation target of 4 percent, plus or minus 1 percentage point, as the leu continued to weaken and the Romanian government boosted spending on infrastructure and social programs after joineding the European Union a year ago.

The central bank board also left its minimum reserve requirements on commercial bank deposits at 40 percent for foreign-exchange deposits and 20 percent for deposits in lei.

Inflation was an annual 6.7 percent in November as food prices increased after a drought destroyed a third of Romania's crops, and depreciation of the leu raised the cost of imports and many local goods and services.

The central bank has indicated that government spending is a threat to its inflation target, and that to reduce the overgheating in the Romanian economy fiscal policy needs to be tightened considerably. However, at least in the short term one can imagine that government spending will more than likely increase as the country prepares for next November's parliamentary elections.

The leu, after appreciating throughout 2006 and the first seven months of 2007depreciated almost 13 percent against the euro between the outbreak of the sub-prime bust in August and the end of the year. The leu's drop increases inflation by making items indexed in euros and paid in lei more expensive for Romanian citizens. In Romania, rent, gasoline, phone bills and other goods and services are habitually quoted in euros and paid in lei.

The central bank also indicated that its decision to raise the rate today was influenced by the fact that consumption is at an "unsustainable level in the context of rapid expansion of credit to the private sector, especially of foreign currency loans."

Private debt in Romania increased an annual 55.1 percent in November to 141 billion lei ($58 billion) as individuals and companies took out more loans in foreign currencies, the central bank said on Dec. 28. Total outstanding loans in foreign currencies, mostly euros, increased an annual 74 percent while leu-denominated loans gained 38 percent.

The central bank also said net wage growth, which accelerated to an annual 25.2 percent in October, was further pressuring inflation and outstripping productivity gains, emphasizing the `"risks of deteriorating external competitiveness".

The current account gap in the first 10 months of 2007 widened to 13.35 billion euros ($19.7 billion) from 7.75 billion euros a year earlier. Much of the deficit was created by a surge in imports as the leu's gain made goods cheaper for Romanians and the country eliminated import barriers as it joined the EU.

Romania's trade deficit has steadily deepened during the first ten months of this year, and has already reached over 17.2 billion euro, an increase of over 6 billion euro when compared with the same period of 2006, according to data this week from the National Statistics Institute. The overall trade deficit for the whole of 2006 amounted to "just" some 14.8 billion euro.

Over the same period, the total value of exports grew by 13.2%, rising to 24.2 billion euro, while imports advanced 27.2% to 41.4 billion euro.
In October this year, exports exceeded 2.7 billion euro, a 17.2% increase as compared to the similar month last year. On the other side, imports reached in October the total value of 4.9 billion euro.

The leu has been steadily depreciating as the current account deficit widened and international investors grew more and more wary of investing in countries perceived as higher risk amid the U.S. subprime crisis.

Well, the central bank are now trying to react, but in todays conditions I do fear that this is a question of too little too late.

Sunday, January 06, 2008

Employment and Unemployment in Italy

Italy's unemployment rate fell to a record low in the third quarter of 2007, as more flexible job labour contracts and above trend growth continued to fuel hiring. The jobless rate fell to 5.9 percent from 6 percent in the second quarter, the Rome-based national statistics office Istat at the end of December. That is the lowest since level since Istat began calculating the figures in 1992.

While Italian unemployment has been declining steadily since 1999, so too has trend economic growth, making for a rather unusual combination. Indeed even as we recieve this raher positive employment news, we also have clear signs that the Italian the economy is slowing. Both the Organization for Economic Cooperation and Confindustria - Italy's biggest employers' lobby - cut their 2008 Itialian growth forecasts in December. The OECD lowered its forecast to 1.3 percent, and Confindustria said growth would slow to 1 percent from 1.8 percent this year due to factors including the rising cost of food and oil and the euro rise against the dollar.

The Italian unemployment rate, traditionally one of the highest in Europe, is now below the average for the 15 nations euro zone. Joblessness in the euro zone fell to a record 7.2 percent in October, the latest month so far reported by Eurostat, from 7.3 percent the previous month. The record-low unemployment rate in Italy masks regional disparities in joblessness and may also refllect the growing average age of Italy's potential workforce as people settle for early retirement and gradually drop out of the data. Employment has been growing strongly in Italy since the middle of 2005.

The number of migrant workers employed in Italy has also been growing steadily in recent years.

And if we look at a comparison of the quarter on quarter employment growth between total growth and migrant growthwe can see that after the second quarter of 2006 the majority (if not nearly all) of the employment growth has come from migrants (not how much of the time the pink line is above the green one, this means less native born Italians were employed in those quarters). None of this is surprising as Italy ages, and the effective labour force shrinks.

Another way of looking at the same issue is this chart I have prepared for the number of native Italians employed (estimated by subtracting migrant employment from total employment)

The above chart simply confirms the impression gained from the previous one, that in fact very little increase in employment among native Italians occured between early 2006 and Q3 2007, despite the apparent shàrp drop in the unemployment rate.

To this we need to add Italy's long standing imbalance between north and south. The jobless rate in Italy's industrial north fell as low as 3.4 percent in the third quarter, compared with almost 11 percent in the south of the country. More than half the 1.47 million unemployed seeking work wereactually situated in the south. Again, if we look at the charts for employment growth in the north and in the south, the difference is apparent enough.

Another complicating factor is that a lot of the gain in employment comes from more companies hiring part-time and temporary workers, who don't enjoy the same benefits and job security as full-time staff. Workers without permanent contracts rose 5 percent from a year earlier, while the number of workers with part-time contracts increased 10 percent from the third quarter of last year.

Looking at the above two charts the stall in full time employment after mid 2006 is clear enough, as is the fact that part time employment has continued to climb. Perhaps here we have some of the key to how it is that Italy can have such a low employment rate without sparking wage inflation (especially that 3.4% in the north), and why we are getting such low readings for domestic consumption and such negative outlooks on the sentiment indexes.

In conclusion what I would like to say is that this situation shares some really striking details with what we can see in Germany and Japan at the present time - growing employment, declining unemployment, weak consumption growth, comparatively low wage rises as the labour market tightens - that this has to be more than simply a coincidence, there must be some sort of connection with the fact that these are the planets oldest societies, although what the exact nature of that connection is has yet to be specified and measured.

For a comparison with what has been happening in Japan, try my Unemployment and the Japanese Labour Force (August 2007) and Japan Unemployment September 2007 . For the German situation see Employment and Unemployment in Germany (September 2007).