On top of the political developments in Italy and Spain highlighted in our earlier article, we have two pieces of macro data from the Euro-zone that showed that the interest rate cut by the ECB in its meeting last month was likely warranted.
From Wall Street Journal: Eurostat said Monday the biggest month-to-month declines in September retail sales were in Portugal, where they dropped 3.7%, and Spain, where they fell 1.7%. Sales in France, the region's second-largest economy, declined 0.6%. However, Germany staged a recovery, with retail volume in Europe's biggest economy rising 0.4% after a steep fall in August.
The volume of retail sales fell 0.7% in September compared to August, which is the first drop in sales since May and a much bigger drop than the 0.1% decline that was forecast by economists. Looking at the rate year-to-year, sales fell 1.5%, also a much steeper drop in a 0.5% picked by economists.
This is simply the latest evidence of the slowdown in the euro zone economy and shows that consumers are retrenching amid political and economic uncertainty. The pressures on consumers are a high inflation rate (currently at 3%) and a high unemployment rate (which at 10.2% in September, is the highest rate since records began in 1998).
The outlook for the following few months are bleak as well as the sovereign debt crisis only increases the concern that households will have about their finances amid volatile stock markets and the potential of a default by Greece.
Germany's Industrial Production Falls in September
Looking at Germany individually, industrial production slid sharply during the month of September, with output falling 2.7% compared to August. That reading disappointed forecasts which had called for a much smaller 0.9% decline.
From BusinessWeek: The two-year-old debt crisis is starting to curb company investment and spending as governments struggle to find a solution and financial markets tumble. German factory orders unexpectedly slumped 4.3 percent in September, led by a 12.1 percent plunge in demand from other euro-area countries. The European Central Bank cut interest rates on Nov. 3, saying the 17-nation euro region is moving toward a mild recession.
Production of consumer goods rose 1.1 percent in September, today's report showed. Investment goods production sank 4.7 percent and construction activity declined 0.8 percent.
Germany is the engine of the Euro-zone and the soft data from its manufacturing side certainly raises alarms that the 2nd quarter data, which showed Germany growing at a 0.1% pace, was only the beginning of the soft growth ahead.
Weak Macro Picture's Implications for Euro
The data today - which showed both consumers retrenching as well as weaker production from the bloc's main economy - strengthens the case presented by new ECB President Mario Draghi that the euro zone may be headed for a mild recession.
Those sentiments of weak growth were echoed by Juergen Stark, chief economist on the ECB Governing Council.
Possibly we will see, and I say this with all caution, a red zero in the fourth quarter, Stark said in a speech in Frankfurt today. Growth will be very weak going into 2012 and there are consequences for price and wage developments, he said. Stark also said he assumes the ECB will end its bond purchases as soon as possible as they set the wrong incentives.
A weaker macro picture would put more pressure on the ECB to rollback interest-rate increases from earlier in the year. We saw last week the ECB cut rates by 25 basis points from 1.5% to 1.25%, but rates were at 1% to begin the year. We will be looking for clues from ECB officials as to the timing of any future interest-rate cuts.
While the tension continues to revolve around the political arena in Europe the continuous weak data from the macro side of things should work to pressure the euro over the coming weeks and months.