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Dagmar Aalund
Frankfurt, May 23: Disappointing economic data from Germany and Italy, which make up about half of the euro zone, dealt a blow to recently rising optimism for the region's economic recovery.
Meanwhile, outside the 11 nations, new numbers from the UK showed its economy recovering smartly after talk of a recession early this year. April consumer confidence rose for the fifth consecutive month and is now the highest it has been since May 1998, according to GfK GB Ltd, which conducts the survey. That news overshadowed UK retail sales data that showed an unexpected seasonally adjusted decline of 0.5 per cent in April from March.
Renewed doubt about the euro-zone economy, which undermined the euro in foreign-exchange trading in London, was reinforced by a gloomy prognosis in the Bundesbank's latest monthly report. ``Up to now there are no clear signs of a rapid and strong pickup of economic expansion in the euro area,'' the Bundesbank said in the May report, adding that "the economic weakness isconcentrated mainly in Italy and Germany.''
Poor April business climate figures in Germany and a large drop in Italian industrial orders for April gave added weight to the Bundesbank's comments. "The bad news from the two laggards of Euroland, Germany and Italy, point to a fairly weak second quarter for the area," said Gwyn Hacche, senior European economist at HSBC Securities in London.
However, thriving growth in other euro countries, such as Spain, Portugal and Ireland, and improving conditions in the rest of the world still speak for an overall euro-area recovery in the second half, Hacche forecast. Many economists are expecting growth of around 2 per cent for the euro zone this year. In contrast, Germany's government forecasts its economy will grow only around 1.5 per cent.
The weak data from Germany and Italy also underscore this week's observation by the Paris-based Organization for Economic Cooperation and Development that policy makers within the euro zone face a troubling gap between the weakperformances of the German and Italian economies and the rest of the area, particularly France. And the European Central Bank left its key refinancing rate unchanged at 2.50 per cent, as widely expected. Despite signs that the euro-area economy may not be picking up swiftly, many economists continue to forecast that the ECB will leave rates on hold for some time, following its half-percentage point cut on April 8.
In a surprise to markets, Germany's closely watched business climate index fell in April, disappointing widespread hopes for a rise, according to Ifo, the Munich-based economics research institute. The index, which measures business conditions and confidence in the manufacturing, construction and retail industries, slipped to 89.7 in April from 90.2 the previous month.
That erased the effect of March's rise, which many had thought had finally reversed a trend of nine consecutive monthly drops. In London trading Thursday, the euro lost a little over a quarter-cent against the dollar on the Iforeport. Late Thursday in Europe, the euro was at $1.0622, down from $1.0652 on Wednesday.
The drop in the Ifo index was particularly disconcerting after the ECB's comment in its monthly report this week that euro-area industrial confidence appears to be improving. Among the factors that had raised economists' hopes for a better result in Germany for April were the soft euro, seen boosting export prospects, and the ECB's interest-rate cut. However, those positives were apparently outweighed by several negatives, analysts said. They include higher wage costs feeding through from previously agreed union contracts, higher energy prices and a perception that the German government is sticking with a tax program seen as antibusiness.
Based on the April Ifo result, ``The economic recovery in Germany has become more uncertain,'' said Klaus Baader, economist at Lehman Brothers in London. However, he notes a ray of hope in the component of the index that specifically tracks expectations, separately from currentconditions: For western Germany, the business expectations index rose to 96.4 in April from 95.4 in March, showing a gradual economic upturn is likely to still be in the pipeline. Meanwhile, Italian industrial orders slid by 9.4 per cent in February and some analysts warned the country risked recession. The drop in manufacturing orders is the worst since a 10.8 per cent decline in November 1996.
The Wall Street Journal
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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