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Economy in Brief

by Carol Stone Industry Prospects Tangle with Exchange Rates in Germany & UK March 26, 2004

The tone of business in countries where foreign trade accounts for a significant portion of economic activity is frequently thought to be tied to the nation's foreign exchange rate. A strengthening currency will hurt local activity as exports become too expensive and imports too cheap. But sometimes, causation runs the other way: the currency is strengthening because the economy is performing well. Further, which exchange rate is being considered may also be significant.

This week, industry survey results for March were reported for the UK and Germany. The German Ifo softened for a second month after a substantial improvement that had carried the indicator for January to its best level in three years. The easing in the subsequent months may be related to the strength in the euro which had carried it to its best level since early 1997 (calculated synthetically before 1999, based on 1997 GDP weights). The strong euro is sure to weaken European activity, many may believe. However, there is almost no numerical correlation between the exchange rate and business sentiment, and in fact, prior experience shows that sometimes business sentiment moves ahead of exchange rate developments.

The situation in the UK looks somewhat different, however. The CBI Industrial Trends survey shows very favorable movements in order books. The March reading of -8 is the best level since December 2000, which itself was a one-time spike. On a more sustained basis, British industry looks quite healthy at present, compared with anytime in the last six or seven years. Commensurate with that performance, the pound has been strengthening, reaching highs versus the dollar last seen in 1992. At the same time, it has fallen or remained steady against the euro. And perhaps this opposing move is providing support to British industry, as prospects remain constructive for selling into the neighboring European market.

% Balance Mar 2004 Feb 2004 Jan 2004 Mar 2003 2003 2002 2001
German Ifo Business Climate Diffusion Index -9.9 -8.1 -5.8 -22.9 -17.5 -21.9 -16.7
Memo: US$/Euro 1.2278 1.2640 1.2638 1.0797 1.1317 .9453 .8955
UK: CBI Industrial Trends: Total Order Book -8 -15 -18 -30 -29 -27 -26
Export Order Book -7 -22 -27 -37 -33 -34 -34
Memo:  US$/Pound 1.8276* 1.8673 1.8234 1.5836 1.6346 1.5026 1.4400
  Euro/Pound 1.4879* 1.4774 1.4447 1.4649 1.4456 1.5907 1.6088
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