Euroland Rundown

May 28, 2008

Elevated inflation is spoiling consumer sentiment in Continental Europe. German consumer prices rose by a faster-than-forecast 0.6% in May. They rose 3.8% saar in the last three reported months and by 3.0% y/y, twice the 1.5% per annum pace in the six years between May 2001 and May 2007. The German PPI advanced 7.6% saar in the first third of 2008. Import prices in Germany soared 10.1% at an annual rate in that same four-month period. Not surprisingly, German consumer confidence fell to 4.9 in June from 5.6 in May. The latest readings of French consumer confidence (-41 in May after -38) and Belgian consumer sentiment (a 30-month low of -9 after -7 in April) were also lower. French peresonal spending tumbled 0.8% in April to its lowest level in many years, and Italian retail sales recorded the biggest month-on-month decline in 11 months.

Measures of business confidence have not been hit as sharply as those of consumer sentiment. The German IFO business climate index improved to 103.5 in May from 102.4, but the April-May average of 103.0 was still lower than the 1Q mean of 104.1. Italian business sentiment rose in May (89.6 versus 87.6) following six straight drops, but corporate sentiment in France hit a 29-month low of 102 after 106 in April and 109 in the first month of 2008. Euroland’s composite PMI sagged to 51.1 in May, lowest in 58 months, and averaged 51.5 in April-May, down from 52.1 in 1Q08 and 56.9 in April-May of 2007. The services PMI had a mean score in April-May of 51.3, down from 57.2 a year earlier, while the factory-sector PMI averaged 50.6 in April-May compared to 55.2 a year before.



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