NEWS / Foreign Exchange

In March, the German ifo business climate index might deteriorate for the third consecutive time

The German VAT hike is still likely to be having a negative effect on the ifo business climate in March. German adjusted unemployment may only have declined moderately in March as the usual ???spring upswing??? seems to have already taken place during the mild winter months. Inflation in Germany and the euro area are likely to edge up in March, partly due to somewhat higher energy prices. However, annual inflation rates for Germany and the euro area as a whole can be expected to fall to around 1.5% over the coming months. We expect M3 growth to remain unchanged at about 9.8% yoy. However, monthly increases are likely to diminish.

In March, the German ifo business climate index might deteriorate for the third consecutive time. Even if that were the case, it would not in our view indicate an economic downturn, as the one-off value added tax hike is probably still weighing on the current business assessment. However, the German ZEW economic sentiment lost momentum again. Furthermore, the DAX performance index has deteriorated and the yield spread has narrowed, as long-term interest rates have decreased. In addition, the euro has appreciated. Only the US ISM index has improved and the crude oil price seems to have stabilized, albeit at an elevated level.

Adjusted unemployment declined by 100k on average in each of the last five months. This was connected with the economic upswing and also with the milder-than-usual temperatures. Work on construction projects did not have to be interrupted in the winter months. Therefore the president of the Federal Labour Agency assumed that the usual spring rebound could have already taken place. Despite the quite robust economic performance, unadjusted unemployment might not have fallen much more markedly than in March 2006, and adjusted unemployment might possibly have decreased by 12k only in March. The unemployment rate may have remained stable or have declined slightly to 9.2%.

The harmonized EMU unemployment rate fell to an all-time low of 7.4% in January. As we expect it to have remained at 7.4% in February, it would be 0.8 points lower than last year.

German L?¤nder are expected to start publishing CPI data on Tuesday, with preliminary national results due Wednesday. Inflation in Germany is likely to rise from 1.6 to 1.8% yoy in March. Higher prices for gasoline and heating oil will probably add about 0.1pp to the mom increase of 0.2 %. Overall, seasonal effects should be roughly neutral. Prices for package tours and accommodation services can be expected to fall, whereas prices for clothes typically rise again as the spring fashion enters the shops. The flash estimate from Eurostat is likely to show annual euro area inflation rising from 1.8 to 1.9% in March. Here, too, prices might have been pushed up slightly due to the impact of energy prices. The corresponding mom change is quite strong at 0.6%, but stems mainly from seasonal price increases for clothes. In several EMU countries (e.g. Italy), this effect is very significant. The spike in March inflation rates is a temporary phenomenon, rates will probably drop again in April. M3 growth has probably remained unchanged at 9.8% yoy in February. However, the monthly increase is likely to decrease as credit growth seems to be declining (at least housing loans) and capital inflows are slowing down.