First off, Dave at MacroBlog has a good summary of the core of the economic policy programme adopted by the new German government. He also has some to-the-point comments about ECB credibility issues
But the big news today must surely be the surprising state of the European consumer . Perhaps the most indicative reading on the situation comes from a report from business consultants Deloitte which states that spending on xmas gifts is expected to fall this year by an average 3 per cent (year-on-year) across nine European countries. Revealingly they find that 49 per cent of Europeans believe their economies are currently in recession.
Now that German domestic consumption is declining comes as no surprise. Economic theory offers us sound explanations as to why this might be the case, nonetheless the pace at which this decline is progressing is pretty striking:
Third quarter growth figures for Europeâ€™s largest economy released yesterday showed that after five years of stagnation, Germanyâ€™s economy is locked in a schizophrenic phase. On the one hand the countryâ€™s robust exports, which rose 4.7 per cent from the second quarter, are finally translating into stronger investments, up 2.2 per cent.
But consumption, an essential ingredient of a healthy recovery, fell for the third consecutive quarter, pressed by high unemployment, stagnating disposable income and a broader crisis of confidence.
Hanging as a twin threat over this one-legged recovery are the prospect of an imminent rise in eurozone interest rates and Ms Merkelâ€™s pledge to cut spending and raise taxes to restore the countryâ€™s public finances by 2007.
However, the recent news from France does come as a surprise. Economic data from France had been rather more encouraging lately, and thus the fact that French consumer spending on manufactured goods declined for a second successive month in October – down by 0.6 percent from September, when it fell a revised 0.3 percent – does come as something of a surprise, and is probably like a bucket of icy water over in Brussels and Paris, and, possibly more importantly, over at the ECB in Frankfurt.
It was only last Monday that Morgan Stanley economist Eric Chaney was taking IMF chief Rodigo Rato to taskfor the latter’s argument that â€œit would be good to see more internally driven recoveryâ€ before starting to normalise interest rates. Chaney took the opportunity to make a full-frontal-assault on what he calls “the legend that only exports explain euro area growth”.
“Since 2003, the contribution to growth of external trade has been constantly negative or null for the euro area, while almost constantly positive for Germany. The French GDP data out on November 18 are confirming this once again: French final domestic demand was up 0.9% in Q3 (3.5% SAAR), driven by strong consumption (0.7%Q despite a sharp drop in food consumption) and even stronger corporate capital spending (1.1%Q). ”
Now normally I would be agreeing with him, since as he says the ‘legend’ is derived from the fact that many analysts take Germany as a proxy for the euro area, and this can be deeply misleading. But this latest round of data counsel caution (and maybe some of that caution could have been reflected in Jean-Claude Trichet’s performance last Friday, at least if the Central banker’s job is to stay ahead of the curve it could have been). Lesson: don’t make yourself a hostage to fortune if you don’t want to end up being hoisted on your own pettard. (And Btw: TouchÃ© SeÃ±or Rato).