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Economy in Brief

Europe is Taking a Turn for the Worse…
by Robert Brusca July 10, 2008

Industrial output in the Euro Area is now in a clear downturn, judging from the trends in the Zone’s main economies. For a while, as the euro rose in value, it seemed as though the Euro Area was bullet-proof. German industrial readings remained strong and even had some acceleration has the rest of the Zone and world economies seemed to feel the weight of the pressure of rising oil prices and financial distress. Now that has changed. Italy has been very weak- arguable recessionary – for some time. France has recently given up the pretense of buoyancy and has weakened sharply. In Germany Yr/Yr industrial output growth is now up by just 0.9%.

Good weather was one factor helping Europe to set aside weakness early in the year. But now the wind aided output run is having its true trend laid bare. Output is steadily decelerating in Germany the Euro Areas strongest economy as well as in, France, Italy, Spain and in the EU’s UK. Over the key time horizons for analysis output is unequivocally falling (3-Mo 6-Mo and 12-Mo) with scant exception. Quarter to date growth is weak except for Spain where it’s volatility that is king much more resiliency.

The Euro Area is weakening quickly showing why the ECB felt it only needed to hike rates once as a defense of its honor more than in pursuit of its policy objective: to cap EMU inflation at 2%. It did not feel it needed to act to knock down inflation since I suspect that it agrees with the finance ministers’ unspoken concerns that the various economies are going to do that on their own due to encroaching economic weakness that is now making itself clearly felt.

In time the ECB may undergo criticism for even this small 25bp hike. In its defense it held its hand for a long period trying not to exacerbate all the financial problems as inflation shot over its ceiling. It finally felt that with inflation MORE THAN DOUBLE its inflation ceiling, it had to be seen doing something. It’s hard to argue with that.

Main E-zone Countries and UK IP in MFG
  Mo/Mo 3-Mo 6-mo 12-mo  
MFG Only May-08 Apr-08 Mar-08 May-08 May-08 May-08 Q-2-Date
Germany: -2.6% -0.3% -0.3% -12.2% -1.9% 0.9% -8.3%
France:IP excl Constructions -2.6% 1.5% -1.1% -8.8% -1.7% -1.2% -2.0%
Italy -1.5% 0.3% -0.2% -5.3% 0.9% -2.7% -2.6%
Spain -14.6% 27.5% -16.9% -32.9% -9.5% -7.4% 26.7%
UK -0.6% 0.1% -0.5% -3.8% -0.8% -0.8% -1.8%
Mo/Mo are simple percent changes others are at saars
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