Euro-Inflation Remains At 2.5%; Current Account Deficit Doubles YOY

Monday, July 31, 2006

ECB president Jean-Claude Trichet and his fellow council members may be in the position to announce another pause in the rate-hiking process after their meeting on coming Thursday. According to Eurostat's consumer price flash estimate inflation in the Eurozone remained stable at 2.5% in July.
The Eurozone economy could certainly need such a shot in the arm. Eurostat today also released figures on a dramatically growing current account deficit. "According to the latest revisions, the EU25 external current account recorded a deficit of 36.7 billion euro in the first quarter of 2006, as compared to a deficit of 17.1 billion in the first quarter of 2005 and a deficit of 29.1 billion in the fourth quarter of 2005."
The worsening is the result of a net goods trade deficit of 47.8 billion Euros (Q1 2005: 20.8 billion Euros) whereas the 11.5 billion (Q1 2005: 9.3 billion) surplus in services stems mainly from financial services.
The Eurozone runs current account surpluses with the USA (32 billion Euros), Switzerland (1.5 billion Euros) and Canada (2.9 billion Euros.) Deficitis occurred in trade with Japan (minus 6.1 billion Euros) and "other countries" (67.1 billion Euros.)
Eurostat will release GDP growth rates for the second quarter of 2006 on August 14. A second estimate for growth in Q1 2006 from July 12 had shown growth of 0.7% compared to Q4 2005, well within the means of statistical error.
Low growth or no growth - place your bets.
I'd rather tend to project another growth figure with a zero in the front for Q2 2006 as private consumption does not get back on its feet in Europe due to high savings rates - as much as 10% of disposable income in Austria and Germany - and permanently high energy prices.
Consumers may want to run for even better cover in the months ahead as they will be burdened by rising energy prices and VAT hikes in Germany and Hungary from next year.
Politicians Fight For Influence In The ECB
Although summer heat has brought life in Europe to a standstill market chatter circles around EU initiatives that would give EU politicians another forum to press their wish for stable intererst rates. According to the chatter the EU finance ministers want to establish a regular meeting session just before the meetings of the governing council. Politicians and industrialists have been speaking out this way since last year, hoping that historically low rates may help lifting the EU economy out of the doldrums. They are disregarding inflationary dangers.
it is believed that Trichet completely opposes such a high level forum as it would compromise the mandate of the ECB which is only responsible for keeping inflation low but has no mandate to stimulate the economy.
UPDATE: Jim Picerno has a highly recommended post, looking at the expansive trend in US money supply M2; now that we do not have M3 around anymore. Picerno observes a contradiction: Both M2 and interest rates are rising, a more than unusual anomaly as economic theory says that higher rates lead to lower liquidity.
My two cents are the same as always: It never worked to try to print your way out of problems. I want to add that I consider the unusually high US treasury purchases from the Caribbean banking centers in recent months are quite a mystery. Purchases in the billions by "anonymous" buyers contradict the knowledge that the USA has been sifting through SWIFT (scroll down) money transfer data. Why is it that US authorities never manage to find out the securities buyers of the really delicate transactions, e.g. the put options purchases ahead of 9/11?
Back to the Caribbean: Wouldn't it be an all too easy game to loan unlimited amounts to those Caribbean operators in order to prop up the dollar and keep yields low? I have no proof, but my mind keeps wandering...


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