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Economy in Brief

EU Growth and Inflation Conditions
by Robert Brusca September 28, 2007

Sentiment fell across the EU region in September. The drop was widespread but not severe. Consumer sentiment had the lowest absolute reading but retail sentiment fell the most in September, dropping by five points. Construction sentiment bucked the trend and rose by one point. In EMU the top four countries saw sharp drops in confidence. The UK, an EU member, bucked that trend and saw sentiment rise by 1%. Across the largest EU member economies, Spain and Germany have the lowest relative sentiment readings in their ranges at 56% and 65% respectively.

Across EU it is clear that it is the consumer that is leading the slippage. The lowest relative rank among the confidence indicators is for services followed by consumer sentiment directly and by retailing. The industrial and construction readings are still above the average sentiment percentile reading for the month.

The accompanying chart shows that the slide in overall EU sentiment has been in progress for some time--since about mid-2006. It also shows that inflation has been moving lower steadily until this month when it suddenly shot up above the 2.0% ECB threshold to 2.1%.

Europe is in a dilemma. Not that 2.1% inflation is such a worry; but having inflation spurt while growth slides is a dilemma for a central bank. Since it is the first over-ceiling inflation observation in over a yea, I don’t expect the ECB to overreact to it. But the ECB has been on a bias to hike rates that it put off due to financial markets unrest and this could turn the bias into an actual rate hike. At the same the ECB must be mindful that the euro is high-valued and climbing. There has been squawking from various elements since the euro broke toward and above $1.40.

The ECB will have to puzzle out what risk it fears most. Is the strong euro enough to contain inflation and will it also cool growth obviating the need for a rate hike? Or will the ECB opt for the more direct approach and hike rates risking an even stronger move up by the euro and the risk to growth that such a move could bring?

We shall look for signs of tilting one way or the other on this issue from the various upcoming ECB spokesmen in the weeks ahead.

EU Sectors and Country level Overall Sentiment
EU Sep
07		 Aug
07		 Jul
07		 Jun
07		 %tile Rank Max Min Range Mean r-sq
w/
Confid
Overall 110.8 113.1 113.3 115 85.9 41 117 74 43 100 1.00
Industrial 3 5 5 7 88.2 19 7 -27 34 -7 0.90
Consumer Confidence -4 -3 -2 -2 79.3 34 2 -27 29 -10 0.82
Retail 1 6 5 5 81.5 23 6 -21 27 -6 0.47
Construction 1 0 0 1 95.6 5 3 -42 45 -18 0.44
Services 20 22 20 21 68.4 58 32 -6 38 17 0.80
  % m/m Based on Level Level  
EMU -2.5% -1.0% -0.6% -0.4% 76.5 61 117 74 44 100 0.94
Germany -3.3% -0.9% -0.5% -0.4% 65.2 57 121 79 42 100 0.61
France -1.3% -1.1% 0.6% 0.0% 81.8 27 119 72 47 100 0.80
Italy -0.8% -3.0% -0.9% -1.3% 61.9 90 121 72 49 100 0.79
Spain -2.9% 1.1% -0.9% 1.2% 56.5 161 118 67 50 100 0.67
Memo:UK 1.1% 4.5% -5.7% 1.6% 92.9 6 119 69 50 101 0.38
Since 1990 except Services(Oct 1996) 208-Count Services: 126-Count
Sentiment is an index, sector readings are net balance diffusion measures
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