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Economics – Markets – Strategy
Economics: Eurozone
Consumption supported by strong labour market
While higher food and fuel prices have hurt sentiment and demand in 4Q07 and
1Q08, sentiment is still better than average 2000-07 levels, and even above 2004
level. Both periods saw average quarterly growth of 1.5% in consumption (QoQ,
smoothed). A comparison of US and Eurozone consumer confidence also shows
that while both indices are falling, Eurozone’s index is still at elevated levels
(Chart 3).
Importantly, the labour market is still supportive of wages, and unemployment
is at decade lows (Chart 4). High level of unionisation of labour also supports
wage growth in the face of rising prices. In Germany, for example, wage negotiations
concluded thus far have ended with circa 5% rise in wages in 2008. This is well
above the 3% average inflation expected in 2008. As such, we are comfortable
with our forecast for 1.1% (QoQ, saar) and 1.5% quarterly consumption growth
in 2008 and 2009.
Consumption
should pick up with
higher wages
keeping growth
near potential
Chart 3: Consumer confidence
Chart 4: Unemployment to stay at decade lows
EZ Index
5
0
-5
-10
EZ (LHS)
2000-07 avg
(EZ:-10, US:90)
US (RHS)
US Index
119
109
99
89
%, sa
11
10
9
-15
79
8
-20
69
Latest: May08
-25
59
May-00 May-02 May-04 May-06 May-08
7
Latest: Apr08
6
Jan-93 Jan-97 Jan-01 Jan-05 Jan-09
Investment - consumption pick up and capacity utilisation support
As consumption recovers and remains supportive of growth, the elevated levels
of capacity utilisation should drive investment spending (Chart 5). Despite falling
sharply, the business climate index remains above average of 2005 and 2000-07
Chart 5: Capacity utilisation vs investment spending
% % YoY
86
10
Chart 6: Business climate - better than 2004/05
Index
2
84
6
1
2000-07 avg
(~ 0.13)
82
2
0
80
-2
78
76
Capacity Utilisation
GCF % (RHS)
Mar-93 Mar-98 Mar-03 Mar-08
-6
-10
-1
Latest: May08
-2
May-00 May-02 May-04 May-06 May-08
149