Instant view: Euro zone sentiment, retail sales, unemployment

09.01.2012 07:48

(Reuters) - The euro zone's economy deepened its downturn at the end of 2011 as retail sales fell and sentiment soured, but the first improvement in the business climate in 10 months offered hope that an expected recession may be mild.



"This has recession written all over it, I think. The European Commission's economic confidence indicator slipped to its lowest level since November 2009. There was a sharp and unexpected drop and retail sales, confirming that the escalating debt crisis, the prospect of a recession and the fiscal squeeze is taking its toll on consumer spending.

"Then we have the further pick-up in unemployment. The unemployment rate was stable but the number of unemployed in the region increased for its seventh consecutive month.

"Interestingly, also looking at the survey components, hiring intentions fell further in December so we should probably expect a further increase in unemployment in the euro zone. The euro zone labor market is also in recession.

"As I said, the data has recession written all over it. I think that it is all but guaranteed that we are going to see a contraction in the euro zone economy in the fourth quarter.

"We also think that the first quarter will see a contraction, albeit not as large as in the fourth quarter, so most of the leading indicators such as the purchasing managers index are suggesting a slight easing in the rate of contraction, but it is still in recession territory.

"Then we are going to conclude that we are in a technical recession where you are going to see two consecutive quarters of contraction."


"December's fall in euro zone economic sentiment, together with November's fall in retail sales and the still high rate of unemployment, confirm that the euro-zone economy is in a very bad state.

"The decline in the economic sentiment indicator, from 93.8 to 93.3, was in line with the consensus forecast but weaker than some of the other business surveys, which have picked up lately. The fall leaves the index pointing to annual falls in euro zone GDP of about 0.5 percent, implying that GDP fell very sharply around the turn of the year.

"Admittedly, the ESI has lagged behind the PMI in the past, suggesting that it could follow the latter up in the next couple of months. But note that the PMI also still points to a deep euro-zone recession despite the recent uptick.

"Elsewhere, November's 0.8 percent monthly fall in euro zone retail sales suggests that consumer spending did nothing to offset the weakness of business activity at the end of last year.

"What's more, with unemployment unchanged at a high 10.3% in the same month, consumers have every reason to be cautious. Note that the consumer sentiment index of the European Commission survey fell for the sixth month running in December.

"In all, today's data support our view that the euro zone is heading into a much deeper recession than the consensus forecast suggests. We expect a fall in GDP of about 1 percent this year and an even sharper decline in 2013."


"A further decline in overall business and consumer confidence to a 25-month low in December, a 0.8% drop in retail sales in November and a further 45,000 rise in the number of jobless keeping the unemployment rate up at a record 10.3% comprises a worrying set of data that fuel belief that the Euro zone suffered clear GDP contraction in the fourth quarter of 2011 and is in serious danger of enduring a further drop in the first quarter of 2012. Tighter fiscal policy, squeezed consumers, the seemingly never-ending Euro zone sovereign debt crisis, weakened global growth and financial market turmoil are taking a serious toll on economic activity across the Euro zone.

The only crumb of comfort that can be taken from the latest data is that the rise in unemployment in November was the smallest since June. And the European Commission's business climate indicator improved for the first time since February.

Nevertheless, the business climate indicator was still at the second lowest level since February 2010. And Euro zone unemployment has still risen by a total of 727,000 over the past seven months. Furthermore, further marked increases in unemployment look highly likely given that the European Commission's business and consumer confidence survey revealed a further deterioration in employment expectations among manufacturers, services companies, and retailers.

We expect the ECB to respond to likely Euro zone GDP contraction in the fourth quarter of 2011 and the early months of 2012 by cutting interest rates further. And mounting evidence of retreating inflationary pressures gives scope to the ECB to act. The falling back in Euro zone consumer price inflation to 2.8% in December from a three-year high of 3.0% over the three months to November should be only the start of an appreciable retreat in inflation over the coming months. We expect Euro zone consumer price inflation to be back below 2.0% before mid-2012 as weakened economic activity and high and rising unemployment reduce underlying price pressures and base effects become increasingly favorable due to the waning impact of the sharp increases in oil and commodity prices in late-2010/early-2011.

Specifically, we forecast the ECB to trim interest rates by a further 25 basis points from 1.00% to 0.75% in the first quarter although we do not expect another cut as soon as the 12 January policy meeting. The fact that the decision to cut interest rates in December was only taken as a result of a majority decision indicates that the ECB will probably be reluctant to trim interest rates again as soon as in January and they will also not be pleased to see that the European Commission's business and consumer confidence survey showed that consumers' inflation expectations rose in December.

We also believe that interest rates could very well come down as low as 0.50% in the second quarter of 2012."

(Reporting By Jan Strupczewski)