German Inflation Depresses Financial Market Sentiment

July 21, 2008

Similar to Britain (see previous post), German inflation is too high at all levels but looks most worrisome at earlier stages of production.  Consumer prices advanced 3.3% in the year to June but advanced at a slightly lower 3.1% annualized rate in 1H08 than the 3.5% rate in 2H07.  The deceleration was pronounced outside of energy, where consumer price increases slowed to a 1.2% annualized pace from 2.7% in the second half of last year.  In contrast, Germany’s producer price index accelerated to a 9.4% rate of increase between December and June from 3.9% during the second half of 2007, and non-energy PPI inflation more than doubled to a 4.2% annualized pace from 1.6% in the six months to December 2007.  The total PPI rose 6.7% in the twelve months to June, the largest year-on-year increase since March 1982.

The ZEW Institute conducts a monthly survey of financial analyst attitudes regarding German current economic conditions and expected trends. Rising inflation saps discretionary consumer spending power and keeps the European Central Bank from using lower interest rates to counter softer domestic and foreign demand as well as tighter lending conditions associated with the credit crunch.  The German Dax index of equity prices has lost 20.4% since the end of 2007.  And in the four months between March and July, the ZEW expectations index fell 28.9 points to -63.9, while its sister index for current conditions dropped 15.1 points to +17.0 from +32.1.  Their algebraic sum was -46.7 in July versus -2.9 in March.  German, French, and Spanish industrial production each plunged 2.6% in May, while Italian production fell 1.4% that month.  Several of the smaller economies using the common currency had even worse results, like the Netherlands (-6.0%), Portugal (-5.7%) and Greece (-4.5%).  These outcomes solidify the likelihood of very negative second-quarter growth in Germany and milder but also negative growth in Euroland as a whole.



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