Tuesday 24 June 2008

Eurozone economy tips over

The ECB might want to think again about a rate hike. From Bloomberg:

Europe's manufacturing and services industries unexpectedly shrank and German business confidence slumped in June, increasing concern the European Central Bank's plan to raise interest rates next month will hurt growth.

Royal Bank of Scotland Group Plc's composite index fell to 49.5 from May's 51.1, the first time it's dropped below 50, the dividing line between expansion and contraction, in five years. The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, declined to 101.3 from 103.5. That's the lowest since January 2006.

"The ECB is taking a great risk with the economy by raising rates," said Holger Schmieding, chief European economist at Bank of America Corp. in London. "The data clearly show that a sharp economic downturn is in the pipeline and the bank may end up getting the blame for it."

On the other hand, the ECB cannot ignore persistently high inflation.

The PMI's price index makes "painful reading," said Kenneth Wattret, chief euro-area economist at BNP Paribas in London. An index of input costs jumped 3 points to 67.4 in the month, the highest since October 2008, while the reading for output prices rose to 55.6 from 54.8.

And there is always the hope that, somewhat like in the US so far, the dip in the PMI below 50 will be limited.

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