Euroland Economic News

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PUBLISHED AUGUST 12, 2014
UK wage growth to stay weak: survey
But other reports say salaries are set to rise at a faster pace

[LONDON] British employers expect wage growth to remain weak, according to a survey of personnel managers that contrasted with other reports that salaries are set to rise at a faster pace.
The report from the Chartered Institute of Personnel and Development (CIPD) showed private sector median wage settlements in the year to June 2015 are expected to be 2 per cent. They were 2.5 per cent in 2013.
Economists polled by Reuters expect inflation to average just below the Bank of England's 2 per cent target until midway through next year, meaning wage settlements would barely rise in real terms, according to the CIPD's findings.
A survey last month from the Institute of Directors showed two-thirds of company bosses intended to hike staff pay at least in line with inflation over the next 12 months.

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PUBLISHED AUGUST 12, 2014
German economy seen contracting in Q2
It underperforms Spain, which grew 0.6% in same period

[FRANKFURT] Germany probably underperformed Spain in the last quarter for the first time in more than five years as the euro-area recovery almost ground to a halt.
After leading the currency bloc out of its longest-ever recession last year, Europe's largest economy contracted in the three months through June, according to a Bloomberg News survey.
The downturn in the region's powerhouse highlights the fragility of a revival that European Central Bank president Mario Draghi has described as modest and uneven.
The 18-nation euro area is struggling to boost growth and inflation even amid unprecedented ECB stimulus, with Mr Draghi citing inadequate structural reforms as a key reason.

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PUBLISHED AUGUST 12, 2014
Germany's SMEs hit by sanctions on Russia
Orders drying up as Russian customers put off purchases

[MUNICH] MWL Apparate Bau GmbH, based in the eastern German town of Grimma, has relied on strong ties with Russia to bolster business. Today, those links don't mean much.
The maker of equipment such as pressure vessels and hot water tanks for the chemical and petrochemical industries has seen a "significant" decline in orders in the last six months due to the Ukraine crisis, sales chief Reinhard Weber said.
The company has annual revenue of about 20 million euros (S$33.5 million).
"There are two contracts from Russia we didn't get and we think that's for political reasons," Mr Weber said in an interview. "They're afraid of sanctions being extended - that they will make an order and that we won't be able to fulfil because of political decisions in Germany or Europe."

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German investor sentiment hits 20-month low

AAP AUGUST 12, 2014 8:00PM

Investment sentiment in Germany fell to its lowest level in nearly two years in August amid concerns about the economic fallout from current global crises, a survey has found.

The widely watched investor confidence index calculated by the ZEW economic institute fell by 18.5 points to 8.6 points in August, its lowest level since December 2012, it said in a statement.

Analysts had been projecting a shallower drop to 18 points this month.

"The decline in economic sentiment is likely connected to the ongoing geopolitical tensions that have affected the German economy by now," ZEW said.

The institute did not elaborate further, but the German economy ministry said in a report earlier that the Russia-Ukraine crisis is taking its toll on Europe's top economy, as well as the turmoil in the Middle East.

"In particular, current figures on industrial production and incoming orders suggest markedly reduced investment activities on the part of German firms against the backdrop of uncertain sales prospects," the statement continued.

"Since the economy in the eurozone is not gaining momentum either, the signs are that economic growth in Germany will be weaker in 2014 than expected."

For the survey, ZEW questions analysts and institutional investors about their current assessment of the economic situation in Germany, as well as their expectations for the coming months.

The sub-index measuring financial market players' view of the current economic situation in Germany fell by 17.5 points to 44.3 points in August, its lowest level since January.

A frequent criticism of the ZEW index is that it can be volatile and is therefore not particularly reliable.

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Germany sees lowest inflation in four years
AAP AUGUST 13, 2014 5:30PM

Inflation in Germany, Europe's biggest economy, fell in July to its lowest level in over four years, official data showed.

The federal statistics office Destatis on Wednesday calculated German inflation dropped to 0.8 per cent year-on-year, its lowest level since February 2010, after rebounding to 1.0 per cent in June.

Inflation has been unusually low across the 18-nation eurozone, fuelling concern the region could slip into deflation: a sustained and widespread drop in prices that hampers economic activity and threatens job losses.

While falling prices may sound good for consumers, deflation can trigger a vicious spiral where businesses and households delay purchases, throttling demand and causing companies to lay off workers.

Such concerns persuaded the European Central Bank to cut interest rates in June and unveil other measures to ease monetary conditions in the single currency area.

Using the Harmonised Index of Consumer Prices (HICP) - the yardstick used by the ECB - inflation in Germany stood at 0.8 per cent in July, far below the bank's annual inflation target of just below 2.0 per cent.

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Eurozone industrial production falls in June
DOW JONES NEWSWIRES AUGUST 13, 2014 7:15PM
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Industrial production in the 18 countries that share the euro fell for a second straight month in June, an indication that the currency area's economic recovery may have faltered again in the second quarter.

The European Union's statistics agency Wednesday said output from factories, mines and utilities fell 0.3 per cent from May, and was unchanged compared with June 2013. That was a surprise, with 21 economists surveyed by The Wall Street Journal last week estimating the production rose by 0.3 per cent during the month.

Eurostat will Thursday release its measure of economic growth during the second quarter. Economists expect the agency to record a second straight quarter of slowing growth, with gross domestic product having risen by just 0.1 per cent from the three months to March. The weakness of industrial production will likely cement those expectations.

The eurozone's economy has struggled to grow in the years since the 2008 financial crisis, and in particular has lagged behind other parts of the world economy since its interlinked government debt and banking crises erupted in late 2009.

But with the worst appearing to have passed last year, policy makers had hoped for a gradual acceleration in the rate of growth as 2014 advanced. Instead, the first quarter marked a slowdown from the final three months of 2013, and hopes for a significant rebound in gross domestic product during the second quarter have faded with every data release. Without higher rates of growth, the currency area will struggle to reduce its high levels of debt and unemployment.

Weak demand and high joblessness across much of Europe's economy is reflected in inflation rates far below the European Central Bank's target of just under 2 per cent. Spain's statistics agency Wednesday said consumer prices were 0.4 per cent lower in July than a year earlier, having previously estimated prices were down 0.3%. Portugal's statistics agency Tuesday said consumer prices were down 0.7 per cent on the year in July, a sixth straight month of deflation.

The European Central Bank responded to weakening growth prospects and too-low inflation by announcing a package of measures on June 5 that included interest rate cuts and cheap, medium-term funding for banks that is intended to be passed on to businesses.

But there are fresh threats to the already fragile recovery. Germany's Economics Ministry said Tuesday that the eurozone's largest economy had slowed in the second quarter in response to the uncertainty caused by the crises in Ukraine and the Middle East.

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UK unemployment hits lowest level since 2008
DOW JONES NEWSWIRES AUGUST 13, 2014 7:30PM
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Unemployment in the UK in June fell to its lowest level in six years but, at the same time, total pay declined; which may ease pressure on the Bank of England to raise interest rates.

The Office for National Statistics said unemployment fell by 132,000 in the three months to June to 2.08 million, or 6.4 per cent of the workforce. That is the lowest unemployment rate since 2008.

Earnings in the UK are growing at a very modest pace. Average weekly earnings excluding bonus payments rose at an annual pace of just 0.6 per cent in the three months to June, the slowest pace of growth since comparable records began in 2001, the ONS said.

Including bonuses, however, average earnings declined by 0.2 per cent.

Officials at the Bank of England have indicated they would like to see Britons' incomes rising at a steadier pace before deciding whether to raise interest rates, which have been pinned near zero since March 2009.

ONS data shows record numbers of Britons remain in work. Total employment stood at 30.6 million, or 73.0 per cent of the workforce, close to the record set in the three months to May.

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Euro zone economy flatlines

PUBLISHED: 0 HOUR 41 MINUTES AGO | UPDATE: 0 HOUR 28 MINUTES AGO

Euro zone economy flatlines
Risks to Europe’s economic growth are increasing because of conflicts such as the Ukraine crisis, says the European Central Bank. Photo: Reuters
The euro area’s recovery unexpectedly stalled in the second quarter as its three biggest economies failed to grow, underlining the vulnerability of the region to weak inflation and the deepening crisis in Ukraine.

Gross domestic product in the three months through June was unchanged (meaning zero growth) from the first quarter, when it increased 0.2 per cent, Eurostat, the European Union’s statistics office in Luxembourg, said on Thursday. The median of 37 forecasts in a Bloomberg News survey was for growth of 0.1 per cent. In a separate report, the agency confirmed inflation at 0.4 per cent in July.

Economic stagnation, consumer-price growth at less than a quarter of the European Central Bank’s goal and increasing economic risks from a worsening standoff between Russia and Ukraine highlight the challenges policymakers face. Bank president Mario Draghi committed last week to build on the unprecedented stimulus unveiled in June if the outlook deteriorates.

“With the geopolitical tensions not cooling down for the time being, there is little likelihood that the growth pace will accelerate in the second half of the year,” said Peter Vanden Houte, chief euro-area economist at ING Groep in Brussels. Yet, the ECB is likely to “stand pat for the remainder of the year. Big decisions on more unconventional policy measures will have to await 2015,” he said.

GERMAN CONTRACTION
Having led the bloc out of its longest-ever recession last year, Germany’s economy shrank 0.2 per cent in the second quarter, its first contraction since 2012, while France unexpectedly stagnated, data showed on Thursday. Italy succumbed to its third recession since 2008, with GDP falling 0.2 per cent in the April-June period.

At the same time, the Spanish economy expanded at the fastest pace since 2007, and the Netherlands returned to growth. The euro-area economy grew 0.7 per cent in the year.

The data come two months after the ECB resorted to targeted long-term loans and a negative deposit rate to bolster growth, lending and inflation. Consumer prices rose 0.4 per cent in July from a year earlier, compared with policymakers’ goal of just under 2 per cent.

The ECB predicted in June that the euro-area economy would expand 1 per cent this year and 1.7 per cent in 2015. Last week, Mr Draghi said risks to the outlook are increasing because of conflicts such as the Ukraine crisis, and held out the prospect of new unconventional tools such as purchases of asset-backed securities and large-scale quantitative easing. New forecasts are due in September.

RUSSIAN SANCTIONS
The European Union has agreed to curb Russia’s access to bank financing and advanced technology in its widest-ranging sanctions yet, eroding confidence in the region’s recovery.

German investor confidence fell in August to the lowest level since 2012, and the country’s economy ministry said last week that geopolitical tensions “more than anything, led to a clear reticence in orders” at the end of the second quarter.

Henkel, the German maker of Persil laundry detergent, said on August 12 that earnings growth will slow in the second half as Russia’s dispute with Ukraine and military battles in the Middle East harm business. Schlumberger, the world’s largest oilfield services provider based in Paris and Houston, sees Russian sanctions on technology including fracking and deep-water drilling impacting its third-quarter earnings.

Jens Weidmann said in an interview with Phoenix TV this week that Germany’s central bank, which he heads, is “more or less sticking” with its forecasts for German growth of 1.9 per cent this year and 2 per cent in 2015, and sees the “relatively positive basic trend” continuing despite the risks.

Manufacturing and services activity in the country and the euro area picked up in July, according to surveys of purchasing managers, and unemployment in the region continues to decline.

“I’m personally optimistic that the cyclical upswing in the euro area will continue,” said Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich. “The things like geopolitics that are weighing on sentiment are going to have a little quantitative impact.”

Bloomberg

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Its somewhat of a joke to attribute EU's economic problems to the Ukraine conflict. Russia is a net exporter to the Euro area so Russia suffers far more than the EU from trade sanctions, for example German exports to Russia only accounts for about 3% of their total exports, thats rather insignificant.

EU's economic problems stem from the same structural issues that plagued them for years, an overly strong currency doesn't help either. They will continue to struggle as long as these issues aren't resolved. I suspect the EU sovereign debt crisis will make a comeback at some point, possibly a few years from now when creditors of the peripheral economies run out of patience.

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German govt bonds hit record highs
DOW JONES NEWSWIRES AUGUST 15, 2014 12:15AM

Nerves over Russia and a shrinking German economy are making steady, super-reliable German government bonds a red-hot investment.

Bond yields fall when prices rise. In Germany's case, yields have crashed. The yield on the country's 10-year benchmark bond has almost halved this year, dipping below 1 per cent for the first time in history on Thursday, showing that these bonds are more in demand than they were even in the depths of the eurozone debt crisis. Only Japan, famous for its wafer-thin yields, offers more meager returns on long-dated government debt.

Even with returns at such slender levels, most investors aren't balking, and some expect Bunds' persistent rise to keep boosting other bonds in their wake.

"Bunds feel like something of a dark star at the center of the fixed-income universe. We'll see them exerting a gravitational pull on other yields and credit spreads as investors look for yield elsewhere," said Mark Dowding, co-head of investment grade debt at BlueBay Asset Management, which manages $US66.6 billion.

"We're in a situation where you have ultralow interest rates as far as the eye can see," Mr Dowding said, adding that BlueBay favors Bunds in its portfolios relative to US and UK debt, due to the brighter economic prospects in those countries that may prompt their central banks to raise rates soon.

Driving the long-running rally further, Thursday's data showed Germany's economy, the biggest in the euro area, contracted by 0.2 per cent in the second quarter of this year, capping a wave of disappointing economic data that has swept over the currency bloc in recent weeks. The slowdown piles further pressure on the European Central Bank -- which unveiled a package of easing measures in June -- to hold interest rates at record lows for years to come and even consider more radical policies, such as a US Fed-style program of asset purchases known as quantitative easing, all of which would support the Bund further.

Sanctions and tensions with Russia have also scared investors into the safety and liquidity of Bunds and crimped the German economy further.

"Russia and Ukraine have clearly had a major impact on global bonds, and the Bund market is more sensitive to a safe-haven rally than other markets," said Steve Cohen, head of international fixed income at BlackRock, which manages $US4.32 trillion.

This year's plunge in Bund yields -- the 10-year bond yielded 1.9 per cent at the start of the year -- has outstripped even a hefty and unexpected rally in US debt. The 10-year US Treasury bond currently yields 2.41 per cent, down from roughly 3 per cent. There is little enthusiasm for such paltry yields from investors, many of whom entered 2014 betting that safe-harbor bonds would falter as global growth picked up. But many retain a preference for German debt, given the likelihood that central banks including the Fed and the Bank of England will soon have to contemplate rate rises as economic growth gathers pace.

BlackRock's Mr Cohen said the firm prefers Bunds to Treasurys or UK gilts.

That view is shared by fellow fixed income giant Pimco, which said the gap between Bunds and the rest can grow.

"With data like [Thursday's GDP numbers], eurozone bond yields can decouple from the US and UK," said Andrew Bosomworth, the firm's head of portfolio management in Germany.

With US interest rates expected to rise in 2015 or 2016 as the ECB stays on hold, "being in German debt isn't such a bad thing," said Erik Weisman, global bond portfolio manager at MFS Investment Management, which has $US429.7 billion under management. Mr Weisman prefers eurozone debt to Treasurys. In the first half of 2014, MFS focused on bonds issued by former crisis spots like Italy and Spain, but as those countries' yields have fallen it has increasingly shifted into German debt.

"In absolute terms yield levels everywhere are unfathomable," he said.

For some investors, German yields are simply too low. But few are expecting a sharp rise soon.

"I won't be buying Bunds at 1 per cent -- not because I don't think yields could go a bit lower. But even if you think they will I believe you're better off buying the Netherlands, Belgium, Spain or Italy [for the higher yields they offer]," said Marie-Anne Allier, head of euro aggregate bond management at Amundi, which manages €800 billion of assets.

The gap in debt yields between these eurozone countries and Germany can narrow further despite the setback in eurozone GDP, according to Ms Allier. Growth rates in the currency bloc remain strong enough to prevent a reprise of the eurozone debt crisis, but sufficiently weak to cement the ECB's supportive stance.

"Everybody was expecting a slowdown in the second quarter, and it's been a little bit worse than expected. But it's still consistent with growth of just over 1 per cent in the eurozone for the year as a whole," she said.