Replies to post #3698 on FinancialAdvisor's College Class (FACC)

[FinancialAdvisor]

European Economies: Growth Slows as Germany Contracts (Update2)

European Economies: Growth Slows as Germany Contracts (Update2)

Feb. 15 (Bloomberg) -- European economic growth unexpectedly slowed in the fourth quarter as Germany and Italy, which account for half the region's $10 trillion economy, contracted for the first time in more than a year.

Gross domestic product in the dozen nations sharing the euro grew 0.2 percent in the fourth quarter from the third, when it expanded 0.3 percent, the Luxembourg-based European statistics office said today. That's half the 0.4 percent median forecast of 40 economists in a Bloomberg survey and the slowest quarterly pace since the economy contracted in the second quarter of 2003.

Unemployment of 8.9 percent restrained spending and investment in Germany and Italy and left growth trailing the U.S. for the 12th year in the past 13. The slowdown underpins expectations that the European Central Bank won't raise its benchmark 2 percent interest rate until the end of this year.

``There isn't enough overall demand for companies to start hiring more full-time workers,'' said Holger Schmieding, co-head of European economics at Bank of America in London and a former adviser to the International Monetary Fund. ``We need quite a pronounced rebound in domestic demand.''

Bank of America lowered its 2005 growth forecast for the euro region to 1.6 percent from 1.7 percent after today's report.

Fourth-quarter growth lagged behind the comparable U.S. rate of 0.8 percent and U.K. pace of 0.7 percent. It exceeded the 0.1 percent economists predict for Japan, according to the median of 39 estimates. Japan reports fourth-quarter GDP figures tomorrow.

Forecasts Cut

The European Commission, the executive arm of the European Union, lowered its first-quarter economic growth forecast to about 0.4 percent, compared to a Jan. 12 estimate of 0.5 percent. The forecast for the second quarter was also about 0.4 percent. All figures are adjusted for inflation and aren't annualized.

For all of 2004, the economy grew 2 percent, the fastest in four years. That compares with 4.4 percent expansion in the U.S. The commission is sticking to its forecast of 2 percent growth for 2005, spokeswoman Amelia Torres said.

``These are bad numbers,'' said Ian Stewart, chief European economist at Merrill Lynch & Co. in London. For the European Central Bank, ``a rate rise now would be a costly mistake. The bias to increase rates is conditional on seeing a recovery in the domestic economy, especially in Germany.''

German Contraction

The euro, stocks and bonds were little changed after the report. The euro was unchanged at $1.2975 against the dollar at 4:54 p.m. in Brussels and the Dow Jones Stoxx 50 Index rose 0.4 percent to 2930.58 points. The yield on the benchmark 10-year German government bond rose 1 basis point to 3.49 percent.

Germany's economy unexpectedly shrank 0.2 percent in the fourth quarter after no growth in the third quarter, bringing it to the edge of recession. Italy's economy, the third-largest in the euro region, contracted 0.3 percent in the same period, the steepest decline in GDP in six years. Dutch GDP also contracted.

``Germany scares us a little bit because it's not improving. It's not doing very well at all,'' Electrolux AB Chief Executive Officer Hans Straaberg said today. ``Italy showed weakness and I think that will continue.'' Stockholm-based Electrolux is the world's largest maker of household appliances.

Exports account for about one-fifth of the euro region's economy, twice as much as in the U.S, making growth vulnerable to the euro's 9 percent appreciation against the dollar in 2004. Michelin & Cie., Europe's largest tiremaker, said Feb. 11 fourth- quarter sales dropped 4.6 percent because of the euro's gains.

Signs of Recovery

The decline in German GDP more than offset accelerating growth in France and Spain, the second- and fourth-largest economies in the euro region. Both France and Spain grew about 0.8 percent in the period, driven by increased consumer spending.

Europe's recovery from the weakest performance in a decade was driven by exports last year, as unemployment restrained retail sales. Companies including Volkswagen AG, Europe's largest carmaker, were forced to freeze wages and reduce spending in a bid to counter declining profit. The Wolfsburg, Germany-based company yesterday reported a third consecutive decline in annual profit.

There are signs that growth may accelerate this quarter after the dollar rebounded from a record low against the euro and as oil prices hold below the all-time high reached in October. German investor confidence advanced for a third month in February, a report from the ZEW Center for European Economic Research in Mannheim showed today.

`Temporary Disruption'

``We don't see this as the start of a new slowdown but a temporary disruption which was caused by oil and the exchange rate,'' said Gernot Nerb, head of industry research at the Ifo economic research institute in Munich. ``Some of this disruptive trends have recovered a bit. In Europe, domestic demand is still strengthening but we need to see greater dynamism.''

France's expansion was helped by former Finance Minister Nicolas Sarkozy's measures permitting early withdrawals from employee-savings accounts and cutting inheritance and gift taxes. In Germany, Chancellor Gerhard Schroeder introduced tax cuts worth 6.5 billion euros ($8.4 billion) to revive consumer spending.

ECB Chief Economist Otmar Issing said Feb. 11 ``the driving forces of growth should change to the domestic side this year.'' The ECB has held its benchmark interest rate at 2 percent since June 2003 in order to revive growth, while the U.S. Federal Reserve raised rates six times to 2.5 percent.

Investors don't expect the ECB to raise interest rates in the first half of this year, futures trading suggests. The implied rate on the three-month Euribor interest rate futures contract for June settlement fell to a six-month low of 2.21 percent on Feb. 11 and was at 2.24 percent today.

The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the euro's introduction in 1999.

Today's GDP report is the first estimate and didn't provide a breakdown of components. The statistics office will publish those on March 2.


LINK: http://www.bloomberg.com/apps/news?pid=10000085&sid=ayUzHNEqpOL0&refer=europe

[FinancialAdvisor]

German February Unemployment Rises to Postwar Record (Update3)

German February Unemployment Rises to Postwar Record

March 1 (Bloomberg) -- German unemployment rose to a postwar record in February after the economy shrank in the previous quarter and Chancellor Gerhard Schroeder's changes to welfare rules led more people to register as unemployed.

The number of job seekers rose by 161,000 to 4.88 million in February, adjusted for seasonal swings, the Nuremberg-based Federal Labor Agency said today. The adjusted unemployment rate rose to 11.7 percent, a seven-year high, while the unadjusted jobless total jumped to 5.22 million from 5.04 million in January.

The faltering economy, reductions in jobless benefits and tighter restrictions in eligibility for benefits that took effect in January contributed to a loss of support for Schroeder's Social Democratic Party in an election in the state of Schleswig-Holstein last month. The increase in unemployment has also dented the prospects of a recovery in consumer spending this year.

``The psychological effect of this unemployment figure is absolutely catastrophic,' said Martin Huefner, chief economist at HVB Group, Germany's second-biggest bank. ``People are psychologically shocked and that may cause them to delay purchases of consumer durables.'

The next national elections are scheduled for 2006. The Christian Democratic Union, its Christian Social Union sister party and their Free Democratic Party ally would have a 7-point majority over the Social Democrats and their Green Party coalition partner if elections were held now, according to an FG Wahlen poll for ZDF television published Feb. 25.

Not Convinced

``Unemployment is the most important issue for voters by far,' Matthias Jung, an analyst at opinion researcher FG Wahlen, said in an interview. ``The government's declining popularity is due to the fact that they haven't managed to convince voters they're capable of solving the problem.'

Economists expected the German unadjusted jobless total to increase by 80,000, the median of 23 forecasts in a Bloomberg survey showed. The adjusted unemployment rate is higher than it has been since March 1998, when it was 11.5 percent. The record rate was set in October 1997 at 11.8 percent.

The euro fell as much as 0.5 percent against the dollar to $1.3168 and was down 0.2 percent at $1.3203 at 10:47 a.m. in Frankfurt. Germany's benchmark DAX 30 stock index was little changed at 4355.12 points.

Germany's economy, Europe's biggest, shrank 0.2 percent in the fourth quarter from the third as companies bought less equipment, government spending fell and consumers held back on purchases. The BAG association of 5,000 retailers predicts that sales will decline for a fourth straight year in 2005.

Manufacturing Drag

A report on manufacturing in the 12 nations sharing the euro today showed Germany dragging down growth in the rest of the region. Manufacturing growth accelerated in France and Italy, while slowing in Germany, according to a survey of purchasing managers compiled by NTC Research Ltd. for Reuters Group Plc.

The decline in gross domestic product at the end of 2004 may cause Schroeder's council of economic advisers to cut its forecast for growth this year. Germany's economy may expand no more than 1 percent, Bert Ruerup, the panel's chairman, said in an interview. The panel's November forecast was for 1.4 percent growth.

That contrasts with 3.6 percent growth economists expect the U.S. economy to generate this year, according to a Bloomberg survey. Gains in U.S. payrolls probably accelerated in February, with employers adding 225,000 workers, the median of economist forecasts showed before a government report on March 4.

Statistical Change

Under the German law introduced in January, a married long- term unemployed person will only be eligible for full aid if the jobless spouse also registers, he said. That, combined with ``slow bureaucracy,' is boosting the jobless count, said Hermann Ross, the Labor Agency's chief statistician, in an interview.

``The gain can be explained, for the most part, in that former welfare recipients are now registered as unemployed and that relatives of those receiving aid had to register themselves,' Labor Agency President Frank-Juergen Weise said in a statement distributed in Nuremberg today. ``Beyond that, we had the winter slump and the economy was still weak.'

Unemployment increased by 10,000 to 20,000 in seasonally adjusted terms when excluding the effect of the new labor law, Labor Agency Vice-President Heinrich Alt said at a press conference today.

Even before the labor-market changes, German unemployment had risen for 11 months as companies moved jobs to countries with lower labor costs and stagnant domestic demand deterred hiring.

Labor Costs

At 49,609 euros ($65,739), German annual employment costs are the highest in Europe, according to Deloitte & Touche LLP. A French job costs 43,990 euros and a job in the U.K. costs 41,875 euros, the company said. Employment costs are at 6,490 euros in Slovakia, 7,211 euros in Poland and 7,423 euros in Estonia, the three cheapest countries for employers, Deloitte said.

Miele & Cie KG, a 105-year-old maker of washer-dryers and vacuum cleaners based in Guetersloh, said Feb. 18 it will cut 1,077 jobs, or almost 10 percent of its domestic workforce by Sept. 30, to reduce costs. Munich-based HVB last week said it will eliminate as many as 2,400 jobs, or 4 percent of its workforce.

Service companies are also firing German workers. Around 26,000 abattoir workers have lost their jobs in the past months as companies including Danish Crown AmbA commission companies that employ Poles, Czechs and Hungarians, the NGG labor union -- representing 236,000 workers in Germany's food, restaurant and hotel industries -- says on its website.

Working Longer

``There won't be any quick improvement in the labor market,' said Ralph Wiechers, chief economist at the VDMA machinery industry group in Frankfurt, which represents 3,000 companies including Robert Bosch GmbH and ThyssenKrupp AG. ``There is tremendous pressure on companies and employees to adjust' to cheaper competition from other countries, he said.

Rising unemployment is forcing people to work longer and accept pay cuts. The Ver.di public-sector labor union agreed to one-off payments over three years instead of regular pay increases and signed off on longer hours for workers including nurses and rubbish collectors in the western half of the country.

Germany isn't alone in the struggle to fight unemployment. The French jobless rate rose to a five-year high of 10 percent in January, measured by International Labor Organization standards.

The comparable German rate rose to 9.3 percent in January from 9.2 percent in December, the Federal Statistics Office said today. France and Germany, which account for half the $10 trillion euro region economy, have the highest jobless rates among the Group of Seven industrialized nations.


LINK: http://www.bloomberg.com/apps/news?pid=10000087&sid=ayCHyK5Nz7dY&refer=top_world_news