29 November 2005

EZA 714: Briefing note: Euro Economy

Germany/France vs Euro area
Converging growth trajectories within the euro area – Germany as the risk factor, France as a stabiliser The 0.6% q/q growth rate in 3Q05 in Germany and in the euro area – 0.7% q/q in France – may mark the beginning of a sustained recovery. It could be seen as a healthy signal after previous downward convergence of European growth towards the low rate seen in Germany. In 2006/07 Germany is likely to trail the euro area by 0.5% in the annual GDP growth rate, while France is set to modestly out perform. Investment spending in equipment was the biggest positive surprise both for Germany and France (up 3.8% q/q. in Germany); we expect it to clearly exceed current forecasts. Current euro weakness and higher energy prices accentuate the imbalance in German growth – favouring exports over consumption; fiscal policy will sustain this until the end of 2007. Surging energy prices have been an exogenous shock, leading to inflation convergence between Germany and the euro area. But next year’s re-widening will only be temporary, until the German VAT in ’07 brings its inflation back in line with the euro area average. Asset conclusions: A continuing non-inflationary recovery supplies a positive background for stocks, and will contain any rise in bond yields. The country factor is likely to be present in various sectors like industrials, construction and banking.

SummaryAsset conclusions: A continuing non-inflationary recovery supplies a positive background for stocks, and will contain any rise in bond yields. The country factor is likely to be present in various sectors like industrials, construction and banking.

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© Graham Bishop