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Eurozone Economic Headwinds

Eurozone Economic Headwinds

Global Economics Weekly Brief

Just like spring blossoms are blown off in inclement weather, economic headwinds are threatening the buds of recovery across the globe. The gusts are particularly strong in the Eurozone.

In France, they were enough to topple President Sarkozy while in Greece they’ve prevented a new government being formed. In the UK, the cool climate is holding back the manufacturing and services sectors and causing house prices to fall again rapidly. And all this is before many of the cold, hard austerity measures have come through the garden gates. The worry is that severe and synchronised pruning across the major economies could set the recovery back still further. We need some green fingered policymakers and sunny news to warm the economic earth and promote a deep-rooted recovery.

Unemployment in the Eurozone rose to its highest rate in 15 years in March and will continue to rise rapidly. The overall unemployment rate in the Eurozone rose to 10.9% in March, its highest since April 1997. As usual there was plenty of variation across countries. Germany is enjoying a comparatively low rate of 6.8%, while Spain is stuck at a rate of 24.3%. The weaker countries in the Eurozone are also storing up skill problems for the future as youth unemployment rates have grown to over 30%+ in Spain, Greece, Portugal, Ireland and Italy. In contrast the rate is just 7.9% in Germany. WATCH THIS SPACE!

Eurozone retail sales increased modestly in March. Retail sales grew by 0.3%m/m in March, which was enough to deliver a positive outturn for Q1 as a whole. But that's about as far as the good news goes. Sales are still down 0.5%y/y and are 4% below their 2008 peak. Performance varies widely by country. In France, sales are quite robust. But in Spain sales have fallen again and are now 22% below their peak. A weak consumer sector is just one of the many problems facing the Spanish economy right now.

Eurozone private sector activity contracted again. The composite Purchasing Managers Index (PMI), a key survey of activity across manufacturers and service providers, dropped even more sharply than expected in April. Lower volumes of new orders in both manufacturing and services causes the drop in output which in turn hit confidence about the future.

European Central Bank (ECB) leaves rates unchanged in May. It was no surprise that the ECB left rates unchanged at 1%. Even though economic conditions are weakening in the Eurozone (12 out of 17 countries are now in recession) the ECB is reluctant to add more stimulus until the impact of its €1 trillion loan to the banking sector becomes clear. On top of this, inflation is above its 2% target. The flash estimate fell back to 2.6%y/y in April from 2.7% in March. BANKS ARE STILL STASHING CASH AT THE HIGHEST LEVELS EVER RECORDED.

The UK manufacturing and service sectors slowed in April. The UK manufacturing PMI survey showed the sector is still expanding, but at a slower rate as weaker global demand hit new export orders. It was similar story in the services sector. New business was strong, but strong competition hit margins. The construction PMI also fell back in April, but it still suggests remarkably strong growth. This is a real puzzle for policymakers as it conflicts so sharply with the official GDP data which recorded a 3.6% contraction in construction in Q1.

UK house prices fell again.
It’s no surprise that Nationwide and Halifax both reported falling house prices in April as the end of the stamp duty holiday in March took away the little boost to demand there was. However, remortgage approvals rose by 5%m/m in March. This could be the effect of higher funding costs feeding into mortgage rates and encouraging existing homeowners to lock into new fixed rate loans. MORE RATE RISES TO COME SOON!

The US job market goes a bit European. The US payrolls survey showed employment increased by 115,000 in April, about half the rate of growth of the preceding three months. Public sector employment fell by 15,000 but the 130,000 growth in private sector jobs was strong enough to offset it. The US unemployment rate fell to 8.1% in April but only because more people left the labour force. Showing worryingly European characteristics, the teenage unemployment rate in the US is now 25% and more than 40% of unemployed people have been out of work for over six months. MORE UNEMPLOYMENT ON ITS WAY!

Chinese manufacturing and services sectors improve a little. Both the official and HSBC PMIs showed an improvement in manufacturing and services in April. The service sector is clearly expanding, but manufacturing is lagging behind, seemingly pulled back by a struggling SME sector. Nevertheless, the improvement in both surveys should calm the nerves of policymakers worried by the slowing economy. The future will show a decline in manufacturing due to the Eurozone and USA issues!

The Euro currency will continue to suffer in the hands of Greece, Portugal, Spain, Italy and Ireland followed by France who are `all` in `deep` financial difficulty as first stated here in January 2008. Who will leave the euro currency first? What future as the Euro? Watch this space!

Plus, the banks are stashing cash at the highest levels ever recorded, why? We all know why, don`t we!

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More Economics and Business Inspiration:
`Accelerate with Impact` -
by Colin Thompson ISBN: 978-1-84549-289-2

Accreditation: UK Registered Learning Provider:10025755

Note: About the Author Colin Thompson

Colin is a former successful Managing Director of Transactional/Print Manufacturing Plants, Print Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives and Non-Executive Director, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM's/Software and over 400 articles published on business and educational subjects worldwide. International Speaker and Visiting University Professor.

Eurozone Economic Headwinds

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