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Economy in Brief

EU Indexes Point Lower - Across the Board
by Robert Brusca February 29, 2008

EU sentiment indexes are also lower year over year. In February the EU/EMU and all large countries' sentiment indexes fell except in Germany where a small bounce was recorded. Conditions in the UK (an EU member not an EMU member) deteriorated very sharply. Among EMU members Italy’s recent slide is the worst.

In percentile terms the ESI (EU sentiment index) stands in the 62nd percentile of its range, about 12 percentage points above its mid-point. That is still a solid expansionary reading. But, it has been slipping for eight straight months, although no single ESI component has fallen for that many months straight. The last two months show the percentage drops in the ESI have accelerated.

Services has the highest absolute net balance reading among ESI components but it is the relative lowest in terms of its percentile standing in its range (residing in the 31st percentile of range a very weak showing). Interestingly, despite concerns about the strong euro, the weakest sector is seemingly, the most trade insulated, services. However, there is another way to look at this since the service sector while having some items for which demand is relatively inelastic, like home services, probably also has a large degree of consumer discretionary items and it contains tourism, the latter is probably quite exchange rate sensitive. The demise of this sector may be reflecting the drop in consumer confidence which, in its 55th percentile, is weaker than any of the economic sectors, except services. Moreover, services are very weak in the UK, 8th percentile, and in Spain, 1.8 percentile. Tourism is important to Spain and the high euro could be taking a toll there. That is also true of Italy where the services sector is in the bottom 15 percent of its range.

Note none of the country specific ESI range readings are shown in the table below.

Retail confidence is relatively strong near the 80th percentile, but is at the 57th percentile in the UK, 50th percentile in Germany, and the 28th percentile in Spain. Oddly with all the weakness signaled in the various Italian reports the EMU retail index scores Italy in the 86th percentile for retailing.

The retailing results stands in marked contrast to consumer confidence which stands in the 38th percentile for Italy. Spain’s rating for the consumer is also in the 37th percentile. The UK stands in the 54th percentile and France in the 52nd percentile. German consumer responses are in the in the 67th percentile, relatively elevated for this group.

Industry is holding up partly due to investment demand in and around the euro area. Industry’s strongest component is export orders in the 84th percentile of their range. And while production expectations are at the 67th percentile and order volume is in the 82nd percentile the production trend expected is only in its 61st percentile. This sector’s strong reading may be living on borrowed time.

Employment expectations have taken a hit in the services sector. Expectations for employment grade out in the 44th percentile and current employment also grades out below 50 at the 44th percentile. Interestingly, retail and industrial sector employment expectations are around the 90th percentiles of their respective ranges.

In this cycle the ESI has taken the largest drop in the UK -20 points followed by Italy at -16.5 and Spain at -14. The EMU index is off by 11.0 points while France and Germany are off by 7.5 and 7.9 points respectively.

EU Sectors and Country Level Overall Sentiment
EU Feb
%tile Rank Max Min Range Mean R-Sq
Overall 100.2 103.3 105.8 106.6 62.9 107 116 73 43 100 1.00
Industrial 0 2 2 3 79.4 53 7 -27 34 -7 0.88
Consumer Confidence -11 -10 -7 -7 55.2 111 2 -27 29 -10 0.83
Retail 1 -3 2 4 81.5 22 6 -21 27 -6 0.46
Construction -7 -4 -3 -1 77.8 45 3 -42 45 -17 0.43
Services 6 11 15 14 31.6 106 32 -6 38 17 0.81
    % m/m     Based on Level Level  
EMU -1.6% -1.6% -0.7% -1.2% 61.5 102 117 73 44 99 0.95
Germany 0.6% -1.9% -0.3% 0.2% 59.8 77 121 79 42 99 0.66
France -1.7% -0.8% -1.6% -0.5% 71.6 74 119 72 47 100 0.79
Italy -3.7% -1.3% 2.3% -4.2% 47.2 146 121 71 50 100 0.78
Spain -3.4% -1.6% -1.4% -0.1% 40.5 188 118 67 51 100 0.65
Memo: UK -8.7% -2.2% -1.0% -4.5% 52.3 156 118 69 50 100 0.42
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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