NEWS / Foreign Exchange

Germany confidence indices expected to decline

• The German ifo business climate and the GfK German consumer confidence are expected to deteriorate in October and November respectively
• CPI inflation in Germany is likely to remain at 2.4 % yoy in October
• M3 growth probably remained strong at 11.5% yoy in September

M3 growth in the euro area probably remained strong in September. However, monetary growth is driven mainly by attractive short term interest rates. In contrast, M3 growth in August was most likely to have been due to risk aversion. In September, investors will to some extent have shifted funds from safe and liquid bank deposits to riskier assets again. Overall, we expect M3 to have risen by about ?‚¬80bn in September stocks. Credit growth is especially hard to predict: On the one hand, MFIs have been trying to cut back lending in view of mounting refinancing difficulties. On the other hand, banks might have been compelled to provide credit as a replacement for funds formerly obtainable from capital markets, e.g. through commercial paper. Overall, we expect private sector loans to have risen at a somewhat slower pace.

In October, the German ifo business climate index might decrease again somewhat. The US ISM index has declined further, and the German ZEW economic sentiment has just remained stable. Furthermore, the crude oil price has gone up and the euro has appreciated recently. However, the DAX performance index and the German yield spread have both improved, with long-term interest rates rising somewhat and shortterm interest rates remaining by and large stable. For similar reasons, we expect the GfK German consumer confidence to deteriorate in November as well as Belgian and French business confidence, Italian consumer confidence and the RBS purchasing managers??™ index for the EMU manufacturing sector in October. However, Italian business confidence might remain stable, after having plummeted in September.

French consumer spending probably decreased in September, because French consumer confidence deteriorated then. EMU industrial new orders are expected to have rebounded in August, just like the corresponding German figure. The EMU current account probably suffered a setback in August, following its normal seasonal pattern and the EMU trade balance.

The statistical offices of the German L?¤nder are expected to start publishing regional CPI data on Friday. Preliminary results for the national German CPI in October could also be released on Friday at the earliest. We expect annual inflation to have remained at 2.4% due to an ongoing base effect related to falling energy prices in October 2006. The month-on-month change is likely to be quite moderate again at 0.1%. Energy prices seem to have had little effect on monthly inflation, whereas food prices could have risen again.