The Wall Street Journal-20080126-Euro-Zone Growth May Rest With Germany
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Euro-Zone Growth May Rest With Germany
MILAN -- As confidence frays in the euro zone, the German economy right now is proving the best hope for sustained growth in the region.
A spate of economic data released Friday underscored what some economists believe will be a regional rebalancing, with workers and consumers in the euro-zone's largest economy earning and spending more as their southern neighbors retrench.
Germany's consumer-sentiment index, published by the GfK market- research group, came in slightly better than anticipated for January, although any long-awaited German shopping spree will depend on inflation calming down.
The mood in Germany started the year strong, as shown by the GfK and by the surprising rise in the Ifo index of January business confidence earlier in the week.
But south of the Alps things are looking tougher.
Spanish unemployment rose sharply in the fourth quarter, jumping to 8.6% from 8% a year earlier, Spain's National Statistics Institute reported Friday. Prospects aren't much better with one in five Spanish jobs linked to the real-estate sector, which has retreated from a decade-long boom. "The construction sector is no longer creating jobs," said Goldman Sachs analyst Javier Perez de Azpillaga.
In Italy, signals are equally bleak. Retail sales fell in November from a month earlier, Istat reported Friday. Retail sales registered a drop across most nonfood sectors, with sales of musical instruments, including products such as CDs, leading the losses, dropping 3%. Telecommunication products such as cellular phones followed, down 2.7%. Sales of shoes and leather goods fell 1.8%
On Thursday, the ISAE research center's monthly survey showed that consumer confidence in January had hit a 29-month low and was sharply below expectations, with the index dropping to 102.2 from 106.9 a month earlier. ISAE cited "strong pessimism" regarding Italy's current situation -- a trash-collection crisis in Naples, a lingering corruption scandal and this week's collapse of Prime Minister Romano Prodi's government.
"Italy could be on the brink of recession very soon," according to Bear Stearns analyst David Brown.
Italians have the most-pessimistic outlook in Europe on the near- term economic future and expect Milan's all-share Mibtel index to continue as the continent' worst performer, according to the European survey conducted by Germany's ZEW index this month.
Elsewhere in Europe, Friday's news revealed a more mixed picture.
Belgium's closely watched business-confidence measure inched up in January to close to neutral, while Dutch consumer confidence fell slightly as producers' optimism rose.
In France, a report from Insee national-statistics office suggested that French manufacturing confidence held steady at levels well above the norm, despite vocal laments from local politicians seeking lower borrowing costs and a weaker euro.
Bank economists -- and money markets -- expect the European Central Bank to cut interest rates this spring as euro-zone growth slows. But evidence of strong growth in bigger European economies, and hawkish attitudes of the ECB governing council, complicate interest-rate forecasts.
The French data "makes a plea for a rate cut difficult in a context of inflationary pressure and tense wage negotiations," said Bank of America economist Gilles Moec.
The joker in the deck is the German consumer, who so far has been slow to offer a domestic buffer to slowing export growth. More spending by Germans would offer a critical prop, as credit growth to Spanish and Italian households is expected to slow, and tax laws make business investment in Germany a less attractive strategy than in the past.
Growth in Germany, which has relied on exports rather than domestic demand for the past two years, is critical if the euro zone hopes to decouple from the expected U.S. slowdown, said Danske Bank economist Niels Henrik Bjorn. He doesn't expect wage trends to be strong but emphasizes that Germany -- and so the euro area -- also depends on the strength of emerging markets.
Accelerating inflation is proving a bane, making consumers reluctant to spend, particularly in Germany and in key exports markets Poland and the Czech Republic.
That dynamic portrays the ECB's bind. Cutting interest rates might provide some relief to the debt-driven economies of the south, but only scare the inflation-wary consumers of the north.
