EMU Economic Indicators Preview

(Week of 25 February to 2 March 2008)

- Both the February German ifo business climate and the March GfK German consumer confidence are expected to have remained unchanged at best
- M3 growth probably accelerated to 11.6% yoy in January
- The German adjusted unemployment rate could have declined slightly to 8.0% in February
- CPI inflation in Germany is likely to have accelerated slightly to 2.8 % yoy in February
- German retail sales might have decreased again in January
- EMU industrial confidence and economic sentiment could have stabilized in February

Region	Indicator	Date	BHF forecast	Previous
GE	GDP / Q4 2007 rev	Tue 26 Feb, 8:00	0.3% qoq 1.8% yoy	0.7% qoq 2.5% yoy
IT	Business confidence / Feb	Tue 26 Feb, 9:30	91.4 -0.2% mom	91.6 -0.1% mom
GE	ifo business climate index / Feb	Tue 26 Feb, 10:00	103.4 0.0% mom	103.4 0.4% mom
GE	GfK consumer climate / Mar	Wed 27 Feb, 8:10	4.5	4.5
EMU	Money supply M3 / Jan	Wed 27 Feb, 10:00	11.6% yoy 11.8% 3ma	11.5% yoy 12.1% 3ma
FR	Consumer confidence / Feb	Thur 28 Feb, 8:45	-35 -1.0 pp mom	-34 -4.0 pp mom
GE	Unemployment / Feb (number, change, rate)	Thur 28 Feb, 9:55	3.640m (nsa) -607k yoy (nsa) 8.7% (nsa) 3.357m (sa) -55k mom (sa) 8.0% (sa)	3.659m (nsa) -626k yoy (nsa) 8.7% (nsa) 3.412m (sa) -89k mom (sa) 8.1% (sa)
GE	CPI / Feb	Fri 29 Feb	0.5% mom 2.8% yoy	-0.3% mom 2.7% yoy
GE	CPI / Jan f	Fri 29 Feb, 8:00	-0.3% mom 2.7% yoy	0.5% mom 2.8% yoy
GE	Retail sales / Jan	Fri 29 Feb, 8:00	103.7 -0.5% mom -3.2% yoy	104.2 -1.0% mom -7.0% yoy
EMU	HICP / Jan f	Fri 29 Feb, 11:00	-0.4% mom 3.2% yoy	0.4% mom 3.1% yoy
EMU	Unemployment rate / Jan	Fri 29 Feb, 11:00	7.1%	7.2%
EMU	Industrial confidence / Feb	Fri 29 Feb, 11:00	1.2 0.0 pp mom	1.2 -0.4 pp mom
EMU	Economic sentiment / Feb	Fri 29 Feb, 11:00	101.7 0.0% mom	101.7 -1.6% mom
IT	HICP / Feb p	Fri 29 Feb, 11:00	0.0% mom 3.0% yoy	-0.8% mom 3.1% yoy
IT	GDP / Q4 2007 and annual GDP 2007	Fri 29 Feb, 12:00	-0.3% qoq 0.5% yoy 1.6% yoy	0.4% qoq 1.9% yoy 1.9% yoy

M3 growth in the euro area will probably have remained strong in January. In general, the yield curve has been flat or even inverted, thus offering little incentive for longer term investments. We expect M3 to have risen at an annual rate of about 11.6%, slightly stronger than in December. This would amount to a monthly increase of about €75bn, broadly in line with the 6-month average. Around the turn of the year, investors had switched from overnight deposits into time deposits. Therefore, M1 growth declined to 3.1 % yoy. Part of this shift is likely to have been reversed in January, accounting for somewhat stronger M1 growth. Credit growth (MFI loans to domestic private non-financial sectors) is likely to have slowed from 11.1 to 10.7% yoy, mostly due to loans for house purchases.

In February, the German ifo business climate index might have remained unchanged at best, after having improved unexpectedly in January. The US ISM manufacturing index and the German ZEW economic sentiment have both recovered and the German yield spread has improved slightly, with both short-term and long-term interest rates having increased somewhat. However, the crude oil price has gone up again recently and the euro has remained strong. Last but not least, the DAX performance index plummeted in January and has been weak ever since. For similar reasons, we are expecting the March GfK German consumer confidence to remain more or less unchanged and the Italian business confidence and the French consumer confidence to have continued declining in February. Therefore, EMU industrial confidence and economic sentiment could have remained unchanged in February.

German retail sales are expected to have continued their decline in January, because retailers' business assessment and consumer confidence had deteriorated. German GDP in Q4 2007 is not expected to be revised substantially. The detailed breakdown of the components will show that net exports and investment in machinery and equipment had a favourable impact on overall GDP, with imports weaker than exports. However, private consumption, investment in buildings and changes in inventories will probably have dampened GDP growth. Italian GDP is likely to have decreased significantly in Q4, just like Italian industrial production. However, this forecast is rather uncertain, due to methodological changes.

On Thursday, the first German Länder are expected to publish state CPI data for February. Subsequently, the preliminary results for national German CPI in February will be released. We expect German inflation to have increased by 0.5% mom and 2.8% yoy. The rise in monthly inflation will have been mainly due to seasonal factors, as prices for package tours and accommodation services surged as well as clothes prices. Energy prices could have had a slightly positive effect, if any. Food prices could have gone up again. The results for consumer prices in February will take account of the base year change as well as the final results for consumer prices in January which will also be published on Friday. We would like to point out that there is a higher degree of uncertainty in our forecasts than usual due to the change of the base year. With the last base year change five years ago, yearly inflation rates tended to be slightly higher than before. HICP inflation in the EMU is likely to be confirmed at 3.2% yoy in January, although there is a risk that the rate could be slightly higher. This would correspond with a monthly inflation of - 0.4%.

Adjusted unemployment fell sharply by 89k in January, much more markedly than had been estimated. The normal weather-related negative effect on outdoor jobs was dampened by relatively mild temperatures and the relief offered by the winter short-time allowance. Thus the decline in adjusted unemployment seems to be exaggerated this winter, and there will probably be a setback in spring, particularly as economic growth is slowing down. However, in February temperatures were again higher than usual. Thus we expect adjusted unemployment to have dropped by 55k in February, although the decline in unadjusted unemployment could have been quite modest.

We expect the harmonised EMU unemployment rate to have fallen slightly again by 0.1 percentage points to 7.1% in January, as the German figures indicate an improvement. As unemployment is a lagging indicator, the credit market turmoil is not likely to have had a significant negative impact yet.

BHF-BANK

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