German economy close to recession
There is more bad news about the German economy. Yesterday, the Ifo index registered a third consecutive sharp fall – down from 97.5 to 94.8 – the lowest level since 1993. The fall was driven by a sharp deterioration of future expectations, as the Germans have switch from euphoria a few months ago to gloom within a few months (himmelhochjauzend, zu Tode betrübt). FT Deutschland and other German newspapers have all the gory details, including the latest consumption data, which show a 0.7% fall during Q2, for the third successive quarter. The estimate is that consumption is likely to remain depressed until the end of the year. The German budget position has moved into a small surplus, according to Frankfurter Allgemeine, mostly due to consolidation at state and communal level, while the federal government was still run a small deficit.
Dullien on the German economy
Writing in Eurozone Watch, Sebastian Dullien says that there can be no doubt that the German economy is facing a severe downturn, and criticises that German politics, and many newspapers even, are complacent about the risks that lie ahead. There is currently no broad public support for a stimulus programme, except on the political fringes. While Germany’s labour market has improved, the changes are not sufficient to offset the big shocks stemming from the appreciation of the euro, and the deceleration of global demand.
Hamilton on the European economy
James Hamilton, of the Econbrowser blog, has presented an interesting calculation. He applied his US recession indicator to euro area data, and concluded that in 2002, the euro area was in, or close to recession, and that recently, the probability of a euro area wide recession has gone up though we are still a long way away from the situation in 2002. The method is not without flaws, as Hamilton states, but it is nevertheless an interesting exercise.
Another national champion bank for Germany
FT Deutschland reports that Allianz, the parent company of Dresdner Bank, is edging towards a deal with Commerzbank, which would create another banking giant alongside Deutsche Bank in Germany. The article has some details. Commerzbank would get 51% of Dresdner, and Allianz would get a maximum of 30% of Commerzbank. At a later stage, Commerzbank would buy the remaining shares. The news report quotes Allianz sources as saying that this is now the most probable outcome, as the prospects of a purchase by China Development Bank are waning. It appears that Allianz is fearful of hostile political reaction if it sold to the Chinese, who are offering cash. The German government favours an even bigger merger, to include Commerzbank, Dresdner, and the state-owned Postbank, which the German government is desperate to sell. In any case, German banking consolidation is about to take a giant leap forward.
Munchau on global inflation
Wolfgang Munchau, writing in FT Deutschland, argues that while the rise in inflation is a global phenomenon, it will be asymmetric, with China, and the US worse affect that the euro area. While there are continued inflationary risks in the euro area, the ECB’s monetary policy has made a significant inflation overshoot unlikely, while in both China and the US there are a number of political scenarios that make a change in both countries’ excessively soft monetary policies unlikely. The result of this mix is a broad increase in global inflation, once the current downturn is over, but particularly pronounced in the trans-pacific regions.
Strong dollar demand by European banks
The FT reports that European banks continue to demand large amounts of dollars, according to the latest ECB and Fed data, while demand from US banks is decelerating. The data show that money market stress remains high. The ECB lent $20bn of 28-day dollar funds at 2.38% per cent and attracted $89.249bn in bids. The article also says that the prices from longer dated swaps suggest that financial market stress will extend well into 2009 and even 2010.
US house price continue to decline
We remain obsessed with US house prices, as the global financial crisis is unlikely to end before house prices have stabilised. The Calculated Risk blog reports that the real Case-Shiller National Home price index is now off 25% from the peak, and that real prices are now back to the Q4 2002 level.
Martin Feldstein on how to bail out the US mortgage holder
Writing in the FT, Martin Feldstein presents his grand plan to bail out the entire US housing market. He says such a bailout is justified as an house price overshoot is likely to lead to a sharp deterioration of the global financial crisis. He makes that point that house prices are still 15% above trend, and that a further 15% fall may be inevitable. What he is concerned about is a decline beyond that level, as house prices that could overshoot by 60% on the way up may also overshoot on the way down. As a solution he favours a programme of “mortgage replacement loans” to provide an incentive to stop defaults among those who now have positive equity but are vulnerable to a further price decline.
Eurointelligence wishes to thank the Collegio Carlo Alberto for their support to help us maintain eurointelligence.com a free public service.