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Surveys to underscore euro worries

26 January 2004

BERLIN – Key European business surveys to be released this week are expected to underscore growing disquiet in industry about the impact on foreign orders of the soaring euro.

With the euro having leapt by about 17 percent over the past 12 months, the business confidence surveys for Germany, France and the 12-member eurozone could add to concerns that the common currency’s rapid advance was posing a threat to the region’s delicately balanced economic recovery.

After chalking up its eighth consecutive monthly rise in December, Germany’s closely watched business confidence survey is widely expected to show signs of peaking in January.

Economists forecast that the report’s reading for the first month of the year will be 96.8 points, which was where it stood in December.

Even so this still leaves the survey, which is drawn by the Munich-based Ifo institute and is be released Tuesday, at its highest level since January 2001.

A similar picture is expected to emerge from France’s business climate survey and the key European Commission business and consumer sentiment reports, which are to be released later in the week. Germany and France are the eurozone’s two biggest economies.

While economists believe that increasing eurozone production could result in a stronger-than-forecast rise in economic growth in currency bloc in the open months of 2004, the surging euro is raising doubts about the sustainability of the 12-member economy’s current recovery.

Ahead of the release of the new indicators, European Central Bank Jean-Claude Trichet renewed his campaign to jawbone the forex markets into allowing the euro to fall back by telling the World Economic Forum in Davos on the weekend that the bank was concerned about big swings in the currency market.

Having gaining ground again last week, the euro is entering the new trading week off its highs at under USD 1.26. This week’s release of a new batch of economic sentiment reports follows the publication last week of an influential survey of Germany’s institutional investors and analysts.

Often considered as acting as a curtain raiser to the Ifo report, the so-called ZEW investor confidence survey, which is compiled by the Mannheim-based Centre for European Economic Research fell for the first-time in three months, as worries about the surging euro’s impact on growth have started to emerge.

That said, however, the release Friday of Belgium’s leading indicator, which economists see as a bellwether for the state of the 12-member economy based around the euro, pointed to added to evidence that the strong euro might dampen growth at least in the opening months of this year.

While the Belgian survey rose in January to its highest point since May 2002, the boost largely came from a strong performance of the retail industry with foreign orders taking a hit in the wake of the euro charging ahead to a series of all-time highs in recent months.

Although Annemarieke Christian, European economist with investment bank Morgan Stanley, believes the eurozone recovery is strengthening, going forward she says that the Belgian leading indicators point to the euro dampening the economic upswing in the months ahead.

After a bleak start to 2003, data shows the eurozone economy having finally turned the corner in the run-up to the new year as the global economic upswing took hold to power ahead the currency bloc’s export machine and consequently bring to an end a protracted period of stagnation.

As evidence that the recovery has been gaining strength, production in Germany and France grew sharply in the final months of last year with industrial output in Italy also beating analysts’ forecasts.

Together Germany, France and Italy represent about three quarters of the eurozone’s economic activity.

All three countries are also banking on a raft of deeply unpopular labour market and welfare reforms to help to shore up the nascent economic recovery and to build voter confidence in moves to overhaul their lumbering economies, in particular as they face up to the challenges of European enlargement and the admission of 10 new EU members in May.

But after barely growing in 2003, the eurozone economy is forecast to record a less-than-spectacular growth rate this year that an increasing number of economists believe will fall short of two percent.

Indeed, the risk for the eurozone, many economists say, is that the pickup in both the US and world economies might stall this year just as the euro continues to climb.

With analysts expecting the euro to chalk up further gains in the coming months, the latest data shows European industry battling to hold its own in the face of the euro’s dramatic rise.

While German exports to the eurozone increased 4.6 percent from November 2002, exports to the three non-euro EU members – Britain, Sweden and Denmark – fell 1.4 percent and exports outside the EU dropped 4.8 percent. About one fifth of the eurozone’s exports go to the US.

Subject: German news