Europe: Europe Economic Review

Germany: Business confidence touches record high

In line with recent trends, the Munich-based Ifo Institute’s business climate index rose from 109.8 in December to 110.3 in January, the highest level recorded since the reunification of Germany. Growing exports to Asia and strong household spending presumably pushed up the index. With unemployment reducing steadily through last year, consumers have been spending more and firms have increased investment to keep pace with demand from markets outside the Euro-zone.

In fact, Germany’s industrial orders grew 5.2% in November compared to a 1.6% expansion in October, but orders from countries outside the Euro-zone jumped around 15%. The German industry’s strong order books are expected to continue driving economic growth in the country, which registered a GDP expansion of 3.6% in 2010 and will likely grow 4% in 2011. Amid this optimism, investor confidence in the country zoomed to a six-month high in January.

The country’s Economy Minister Rainer Brüderle believes that if Germany is able to sustain its scorching pace of growth this year too, it will be able to shrink its budget deficit one year ahead of schedule to below the Euro-zone target of 3% of GDP. Germany’s budget deficit for 2010 was 3.5%. Another year of good growth is expected to trim the deficit to 2.5% of GDP.

U.K.: Fourth-quarter GDP slips on December snow

According to preliminary estimates, the U.K.’s GDP unexpectedly declined 0.5% in the fourth quarter of 2010, after growing 0.7% in the third quarter of 2010. This is the first time since the third quarter of 2009 that the U.K. economy has shrunk. Economists had projected 0.4% growth for the fourth quarter of 2010. The heavy December snow, which hurt the services and construction sectors, is believed to have caused the contraction. However, bad weather is unlikely to have been the sole cause of the lackluster performance, as October and November too recorded flat economic growth.

In another blow to the U.K. economy, inflation surged higher than expected in December due to rising fuel and food prices. The U.K. consumer price index rose to 3.7% year-on-year in December from 3.3% in November, triggering fears that if the present trend continues, inflation may advance to more than double the Bank of England’s 2% target. Swelling inflation is likely to hurt consumer spending further and slow down the economic recovery, especially when the government has started implementing austerity measures.

Meanwhile, the housing market remains obstinately weak. Mortgage data indicated loan advances were unchanged in November compared to October, and 15% lower compared to the previous year. Further, construction output declined 2.1% in November following a 1.4% drop in October. To add to the gloom, housing prices fell again in December, albeit by a smaller margin than they had in the previous month.

Not surprisingly, the manufacturing sector was the bright spot in a month dominated by discouraging economic data. The sector ended 2010 on a positive note, posting robust growth in output, employment, and export orders. In December, the sector’s purchasing managers’ index advanced to 58.3, a 16-year high, from 57.5 in November, indicating a strong pace of growth.

France: Consumer confidence dips on rising unemployment and energy prices

In January, French business confidence rose to its highest level in three years on the back of the improved export outlook for 2011. According to the French national statistics office Insee, an index measuring sentiment among factory executives jumped more than expected to 108 from a revised 102 in December. Business confidence in the Euro-zone’s second-largest economy has largely trended upward over the past seven months, falling only once in November.

The Insee has also reported that consumer spending in the country increased more than forecasted in December. Spending on manufactured goods inched up 0.6% month-on-month while the forecast was 0.3%. Compared to December 2009, consumer spending increased 0.4%. The robust consumer spending data has been attributed to strong car sales, which offset subdued holiday sales owing to bad weather and weakness in other sectors. Car purchases jumped 8.6% month-on-month in December as French households rushed to take advantage of the government’s new-car-purchase subsidy before it expired on December 31.

However, in contrast to the jump in consumer spending, consumer confidence waned for the second successive month in January due to rising joblessness and higher gasoline prices. The fact that the government has already allowed an increase in electricity prices also weighed on consumer sentiments. France’s unemployment rate climbed 1% or by 27,100 in December compared to November, and the number of registered jobseekers touched 2.725 million.

Italy: Business confidence improves despite rise in unemployment rate

Italy’s unemployment rate advanced to 8.3% in November from 8.2% in October on a seasonally-adjusted basis, the highest level since March 2004. It is likely the Euro-zone’s third-largest economy will struggle to rein in its unemployment rate this year as businesses continue to shed jobs. In December, an Italian manufacturer of seamless-steel tubes for pipelines, the world’s biggest, made an agreement with labor unions to cut several hundred jobs, while an automobile giant in the country announced plans to end car production at a domestic plant by the end of 2011. However, Italy’s labor minister has projected that the unemployment rate will remain below 10% this year since the government subsidizes temporary layoffs. Italian law permits firms to lay off permanent employees for up to two years with the promise to take them back when conditions improve. The government pays such workers 80% of their salaries from a special fund.

The Bank of Italy too believes that there may not be a notable recovery in unemployment as GDP growth likely slowed down in the fourth quarter. The central bank has projected that Italy’s pace of economic recovery over the next two years will be weak and fall short of the Euro-zone average. The Italian economy will likely get a boost from rising exports but subdued consumer spending and the government’s austerity program may prove to be hindrances.

Meanwhile, business confidence in Italy rose for the third month in December. The Isae Institute’s manufacturing-sentiment index climbed to its highest level in nearly three years on the strength of improving outlook on industrial demand.

Spain: Robust bond demand diminishes funding concerns

In December, the country’s unemployment rate declined for the first time in five months. The number of unemployed fell by 0.25% compared to November but remained nearly double of the Euro-zone average. The slightly better employment data added to the improved outlook for Spain as several of the world’s biggest investors, including central banks and sovereign wealth funds, made bids for new Spanish government bonds. The robust demand for the bonds allayed fears that the debt-ridden nation may encounter funding problems in the short term. Incidentally, China has declared its commitment to continue buying Spanish government bonds.

In a related development, Spanish Prime Minister José Luis Rodríguez Zapatero has projected that his country’s budget deficit for 2010 is likely to be smaller than the official target of 9.3% of GDP. On the back of stringent austerity measures, Spain’s government has pledged to reduce its budget deficit from 11.1% of GDP in 2009 to 9.3% of GDP in 2010 and 6% of GDP in 2011.

Reports indicate Spain is taking steps to partially nationalize its regional savings banks — known as cajas, which are struggling with high levels of bad loans. The government may ask the cajas to list their shares on the stock market just as conventional banks do. If the banks fail to attract investments, the government would buy their shares using a special bank restructuring fund. The move is expected to convey the message that a government-led rescue of the banks would not add to Spain’s budget deficit. It is noteworthy that, in December, Spain's credit rating was put on review for a downgrade by a well-known ratings agency because of concern that the cajas might need a government bailout.

Russia: GDP grows 4.0% in 2010

Notwithstanding the deadly suicide bomb blast in a Moscow airport, Russia managed to keep its economic recovery intact during the month of January. Though the severe drought pushed up food prices and led to rising inflation in the country, Russia clocked a GDP growth rate of 4.0% for 2010.

On the corporate front, it was a happy New Year for Russia. Enthused by PepsiCo’s move to acquire Russian dairy producer Wimm-Bill-Dann, there was some action in the country’s flagship oil and natural gas industry as well. BP, badly bruised by the Gulf of Mexico oil leakage, announced a share swap deal with Russian government-owned oil major Rosneft to jointly explore for oil and natural gas in the Arctic sea region of Russia. For BP, which had burned its fingers when ties with its Russian JV partner TNK had soured a few years back, the deal was an opportunity to mend fences with the Kremlin. 2011 seems to have ushered in good tidings for Russian companies seeking to raise money in the markets. The latest Russian company to join the bandwagon is ChelPipe, a manufacturer of steel pipes, which recently set a price band for its planned IPO on the London Stock Exchange.

Meanwhile, Russian President Medvedev made his presence felt at the Davos World Economic Forum when he made a pitch for including the currencies of the BRIC group of nations in the International Monetary Fund’s basket of main currencies. He also assured potential investors that he does not have plans to impose fresh taxes on the financial sector.

Hungary: Interest rates raised for the third consecutive month

Hungary raised interest rates in January, the third month in a row. Besides the noble motive of containing inflation, there seems to be more to the rate hike than what meets the eye. Prime Minister Viktor Orban and the central bank governor appear to be at odds with each other. Orban has slashed the governor’s pay and has plans to bestow Parliament with the power to appoint the majority members of the bank’s monetary council, bypassing the governor. The latest rate hike is seen as a policy tightening move by the central bank governor ahead of the monetary council appointments in March.

Hungary, which assumed presidency of the European Union in January, has something to cheer about as far as industrial production is concerned. Despite allegations by foreign companies that they are being discriminated against by the Orban government, the presence of German automakers such as Audi helped exports from Hungary surge during last year. On a cautionary note, it remains to be seen if the manufacturing output could be sustained in 2011. The government has set a target of 3% GDP growth for 2011.

Poland: Government moves to reduce debt

Poland, the only European Union member to avoid a recession in 2009, seems to be beset with economic policy concerns. Rising public debt, which is running close to 55% of Poland’s GDP, is a big headache for the government. The Donald Tusk government chose to address the issue by attempting to curb flows to the country’s private pension system. Polish employees currently contribute about 8% of their salaries to the scheme, which has a reputation of being more secure than the government-run pension plan. The Tusk government has lost face on the issue as none other than the central bank governor has openly slammed the administration’s move.

The Polish government’s plan to reduce public debt proved to be a bolt from the blue for the country’s effort to rebuild its crumbling infrastructure. Poland, a co-host with Ukraine for the 2012 Euro Cup soccer championship, was slated to get at least 3,000 km of new highways, besides fast railway lines and airports. Now, it turns out only 1,800 km of roads will be built as the Tusk administration focuses on public spending.

As expected, the Polish central bank raised interest rates to 3.75% in January in response to the rising pressure of inflation. The apex bank said December inflation of 3.1% was above its target of 2.5%. The central bank governor also hinted that the rates may be raised further.

Czech Republic: Industrial output grew in 2010

The government of the Czech Republic under Prime Minister Petr Necas appears to have the backing of the nation’s citizens for its fiscal austerity measures, though they may differ on where the proposed spending cuts should be implemented. Meanwhile, Czech central bank has hinted that it may start raising interest rates by the middle of 2011. Interest rates in Czech Republic have remained at 0.75% since May last year.

Like Hungary, industrial output in the Czech Republic increased in 2010, thanks to demand from Germany as well as a pick-up in domestic demand. Interestingly, exports contribute 70% of the country’s GDP. Moreover, positive industrial trends are expected to be sustained going into the first quarter of 2011. Accordingly, Czech GDP is forecasted to grow at the rate of 2% this year, above the central bank’s projection of a 1.2% growth.