Bad news for Eurozone growth
The star performer amongst the western industrialised world, Germany, released GDP figures this morning that showed the economy had ground to a practical standstill in the second quarter, with GDP increasing by 0.1% against expectations of 0.5%. The statistics office stated that the slowdown was caused by a shrinking trade balance, flagging consumption and weak construction investment. This further adds to worries that the global economy may be on the edge of another economic collapse, after French GDP showed zero growth, and the recent US trade balance was also shown to be shrinking. In fact, the only one of the major economies that has shown an increasing trade balance is China which may again raise questions over the Yuan’s competitiveness, although, the currency has hit record highs against the dollar over the past week as China attempts to cope with soaring inflation. Germany’s poor GDP figures increase the pressure on the leaders of France, and Germany to release a joint statement supporting a closer monetary union in the Euro zone today. However, yesterday both countries stated that talks would not cover the issuing of joint Euro bonds. Therefore, perhaps the best outcome that can be hoped for would be support for the European financial stability fund to take over the bond buying role of the ECB.
The ECB yesterday revealed that it bought €22bn in Euro zone bonds to stop yields on Spanish and Italian debt reaching dangerous levels last week. This raises questions over how long such buying could be sustained for if attacks on the bond markets continue.
The major data release for the UK this morning is inflation. We are looking for consumer prices to fall by 0.2% in July, which is in line with the average fall in the month. We suspect that some discounting activity was brought forward to June, but the moderation in oil prices will help keep the annual inflation rate at 4.2%. We are a little below consensus, but we still expect inflation to rise in the months ahead as the impact of higher energy costs starts feeding through into August and September CPI measures.
Last but not least the Swiss Franc (CHF) has shown surprising weakness falling back to its end of July levels – this sort of fall is not natural and is likley the direct affect of market manipulation AND a lagged response to the very public, unscheduled rate decrease a couple of weeks ago.