04 September 2006

EZA 756 Report: Economy

Germany, France, Euro Area Economy

Mid-cycle slowdown or landing? Germany and euro area in synch but for how long? Euro area growth reached a five year peak in 2Q06 with growth of 3.7% annual rate, 2.4% y/y. The figure may be overstated by 1.5% a. r., given one-offs. In terms of country break down, during the last 12 months Germany caught up with euro area growth, given the bottoming of its construction sector and a recovery in household consumption. Both growth, as well as convergence between euro area and Germany seems to be as good as it gets, given next year’s fiscal restriction in Germany by 0.7% of GDP. Our mainstream scenario is based on gradual (downward) convergence of euro area growth to trend in the coming six months. This would be consistent with the ECB staff projections that growth will decelerate only slightly to 2.1% in 2007. For Germany we forecast negative growth in 1Q07 followed by a re-convergence to trend in the second half of 2007. But the risks for Germany are asymmetrically on the downside given the coincident tightening of fiscal and monetary conditions.

Asset conclusions: the inflation outlook in 2007 seems fairly priced into bond yields, but setbacks might spell risks in the near term. Stocks seem good value relative to prospects of sustained growth

© Graham Bishop