The final revision of Germany’s Consumer Price Index is set to confirm that inflation fell -0.1% in May to bring the annual pace of price growth to a standstill for the first time in at least 17 years. The adjusted version of the metric using a harmonized EU methodology is set to show an even more ominous result, confirming that the annual pace of German inflation shrank -0.1%, the first negative outcome since the creation of the Euro. The onset of deflation in the Euro Zone’s largest economy is a scary prospect for the single currency: if expectations of falling prices become entrenched, Germany may find itself treading water for longer than expected as consumers and businesses wait for the best possible bargain and perpetually hold off on spending and investment; the massive weigh of Germany as driver of economic growth for the Euro Zone as whole means that the bloc’s performance will remain subdued as well, pushing expectations for higher interest rates farther out into the future to hurt the European unit against UK and US counterparts. Indeed, overnight index swaps show traders are pricing in expectations that the Fed and the Bank of England will deliver 100 basis points in rate hikes over the next 12 months while the European Central Bank lags behind with just 61bps in the same period.

Turning to the UK, the Trade Balance is expected to narrow to 2.4 billion pounds in April from 2.5 billion in the previous month. Considering export volumes have been trending sharply lower, down 9.7% to date since peaking in July last year as the global economic downturn crushed overseas sales, it stands to reason that absent a recovery in foreign demand (an unlikely scenario considering the UK’s top trading partners are mired in deep recession) any improvement in the headline figure would come from lackluster import readings. Another drop in Industrial Production fits very neatly into this picture: output is set to shrink at an annual pace of -12.4% for the second consecutive month in April, the most in at least 33 years, largely on weak exports. This speaks directly to the current spending client, revealing that consumers remain on the defensive despite a stronger Pound that would have made foreign-made goods comparatively cheaper. As with most advanced countries, private consumption is the largest component of overall UK economic growth and continued weakness here is likely to keep a lid on any moves towards a sustainable from the current downturn. Indeed, the latest forecasts call for the economy to continue to shrink at least through the first quarter of next year.

This entry was posted on Wednesday, June 10th, 2009 at 1:49 am and is filed under British Pound, Currency Trading, Economic Indicators, Economy, Euro. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.