Old Europe, New Growth

Rob Mackrill - Thu 15 May, 2008

A spritely performance from “Old Europe” – France and Germany – helped Eurozone growth exceed expectations in the first quarter.

Down in Putney, along the bank of the Thames, there’s an oldish Jag parked on a side street with a personalised number plate. Given the one time reliability reputation of Jags, it was perhaps chosen with some justification.

It reads: PE51MST.

The word fits the view prevailing on the UK economic outlook - whether you’re a central bankers, a politician or most likely amongst the majority economists call ‘consumers’. Bad news is chasing us down the street...

The Bank of England says it could be recession down the road. Inflation is going up for some time to come – north of 3%, unemployment is starting to edge up too, credit is harder to come by and costs more – in spite of the best efforts of the Bank of England, house prices are going down and house building has slumped, commercial property prices have too – by 16% since last summer says the Bank of England. Our leading banks have lost billions – Barclays announces another £1bn write down this morning - and once proudly touted government golden rules on borrowing become instead lead weights around Gordon Brown’s increasingly vulnerable neck.

Okay so we’ve had our fill of the bad news. Is there anything we can be OPT1M1ST about? Well, looking at the stock market Mr Market’s mood appears to be cautiously more positive. The FTSE 100 hit a low for the year to date on March 17 closing a little over 5,400. It’s up 15% since at a little over 6,200. MoneyWeek is bullish on Japan and the Nikkei is showing signs of recovery. It hit a four month high close today.

UK stock market sentiment as measured by Sharescope has risen since its March low though remains marginally bearish. As we’ve said, stock markets are the great expectation machines and always straining their eyes on the horizon to see what’s coming...then discounting it before it arrives.

The worst of the credit crisis is over they say but as we can see from Barclays latest £1bn write down and collapsing bank shares, it is by no means over. The FTSE 100 is marginally higher today yet RBS, a constituent of it, has slumped 14%. The bank has given up half its market value over the past year, a grim stat that causes some degree of personal financial pain to your editor. Given the bank is reported to be sounding out shareholders about the level of support for top management; it has hardly a vote of confidence.

Commodities have edged down from their highs perhaps only temporarily but no boom lasts forever. Central bankers will hope this one ends sooner rather than later and the market price mechanism will assert itself once again as the universal regulator of demand. Oil is a little down from its high at $124 and food prices are showing signs of stabilising reports the FT.

As for the Eurozone, “old Europe” – France and Germany – is leading the charge. European growth in the first quarter came in at 0.7% against consensus of 0.5% and that in spite of the drag of sluggish Med economies such as Spain and Italy.

Growth has hit its fastest pace in 12 years in Germany and surprised on the upside in France. Eurozone rates remain at 4% as inflation has bubbled up to a 3.6% high in March, easing to 3.3% in April. If he can keep that virtuous cycle going in the face of ‘cost shocks from abroad’ the European Central Bank’s Jean-Claude Trichet will be in clover.

*** News from the frontline on the ongoing creative destruction of traditional print media... Johnston Press plc, a regional newspaper publishing business with a heavy debt load, is raising £200m plus in emergency funds as ad revenue wilts under the pressure of the internet.

“Traditionally,” reports the Independent “three-quarters of its revenue comes from ad sales.” Those sales have been falling relentlessly. Last year classified ads fell over 3%, car ads more than 8% and larger display ads 4%. Ad revenue fell another 4% in January and February this year. We’ve said it before, we’ll say it again. Sooner or later someone is going to start closing newspapers.

Regards,

Rob Mackrill
The Daily Reckoning