Can the Eurozone Remain at the Party? Howard Archer Country Intelligence Group Global Insight

Can the Eurozone Remain at the Party? Howard Archer Country Intelligence Group Global Insight

Eurozone Growth Robust in First Half 4 (Percent change, q/q, real GDP) 3 2 1 0-1 GDP Dom Demand Cons Inv Govt. Spend Stocks* Exports Imports -2 2005/3 2005/4 2006/1 2006/2

Western European Growth in H1 2006 Q1 Q/Q Q1 Y/Y Q2 Q/Q Q2 Y/Y Q1 Q/Q Q1 Y/Y Q2 Q/Q Austria 0.6 3.1 0.9 3.3 Netherlands 0.5 2.9 1.2 2.8 Belgium 0.9 2.3 0.8 2.8 Norway 0.6 2.7 0.5 2.1 Denmark 0.9 4.2 1.6 2.8 Portugal 0.3 1.1 0.9 0.9 Finland 2.1 4.7 1.9 6.6 Spain 0.9 3.6 0.9 3.7 France 0.4 1.4 1.2 2.6 Sweden 1.4 4.2 1.3 4.8 Germany 0.7 1.7 0.9 2.4 Switzerland 0.8 3.3 0.7 3.1 Greece 2.8 4.1-0.4 4.1 UK 0.7 2.3 0.7 2.6 Ireland 1.2 5.7 0.9 4.9 Eurozone 0.8 2.2 0.9 2.7 Q2 Y/Y Italy 0.7 1.6 0.5 1.5 EU (25) 0.8 2.4 0.9 2.9

Business & Consumer Confidence Healthy (Balance of respondents giving positive and negative replies) 40 30 20 10 0-10 -20-30 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Consumer Industrial Services

PMI Surveys Suggest Growth Has Peaked 65 60 55 50 45 40 19971998 1999 2000 2001 2002 2003 2004 2005 2006 Manufacturing Services

Eurozone Industrial Production & Retail Sales 8 6 4 2 0-2 -4-6 (Percent change year-over-year) 1999 2000 2001 2002 2003 2004 2005 2006 Retail Sales Industrial Production

Threats to Eurozone Growth Euro strength Elevated oil prices Slowing global growth Higher interest rates Tighter fiscal policy in several countries, notably Germany and Italy Consumer spending in some countries could be hit by any downturn in housing markets Any spiking up in political uncertainty eg. Germany, Italy, France (election in 2007)

Threats to Eurozone Growth (2) Companies keen to contain costs. May limit employment as can be costly to reverse Consumers have lingering concerns about jobs and finances Long-term structural problems persist Business and consumer uncertainty over how they will be affected by actual and potential future structural reforms - relating to labor markets, pensions, healthcare, costly welfare systems

European Unemployment Rates (%) US Eurozone EU (25) Germany France Italy UK Spain Netherlands Austria Belgium Finland Greece Ireland Portugal Denmark Norway Sweden Switzerland 0 2 4 6 8 10 12

Eurozone Employment Finally Picking Up % 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0-0.2 2002 2003 2004 2005 2006 q/q y/y

Is Best News on Eurozone Employment Over? 65 Labor Market Indices in Service & Manufacturing Sector PMIs 60 55 50 45 40 2000 2001 2002 2003 2004 2005 2006 Service Sector Manufacturing Sector

Eurozone Consumer Purchasing Intentions 10 5 0-5 -10-15 -20-25 -30 (Balance of respondents giving positive and negative replies) 1999 2000 2001 2002 2003 2004 2005 2006 Major Purchases Over Next 12 Months Major Purchases at Present

Eurozone Inflation How Big A Threat? 4 3 2 1 0 1999 2000 2001 2002 2003 2004 2005 2006 Headline Core (excluding energy)

Could Eurozone Growth Exceed Our Expectations? Yes, if: Global growth holds up Euro remains in a US$1.20 1.30 range Oil prices stay at recent lower levels Consumers become more prepared to spend (pent up demand?) German sales tax hike has limited dampening impact on consumption Employment growth holds up Investment remains buoyant

Germany Reasons to Be Hopeful Corporate restructuring has boosted competitiveness and profits Exports are performing strongly Capital investment very robust in H1 2006. DIHK September survey showed investment intentions stable at highest level since 1992. Construction sector finally growing again after 10 years of contraction

Germany Still Doubts Over The Consumer Corporate restructuring curtailed employment and held down wages. Consumers pressurized Labor market has improved in response to improved activity and orders Will consumers spend? Consumption up markedly in Q1 2006, but relapsed in Q2. Performance remains volatile Sales tax hike in 2007 will bring forward spending to H2 2006. How much will 2007 suffer?

Main Features of Eurozone Forecasts Eurozone GDP growth forecast to moderate from 2.6% in 2006 to 1.8% in 2007. Seen at 1.8% in 2008 Eurozone consumer price inflation forecast to average 2.2% in both 2006 & 2007. Pushed up by German sales tax increase ECB key interest rate to reach 3.50% by end-2006. Forecast to remain there through 2007 Euro forecast to rise to US$1.30 at end-2006, US$1.40 at end-2007 & US$1.47 at end-2008

Western European Growth Forecasts 2005 2006 2007 2008 2005 2006 2007 2008 Austria 2.6 3.0 1.8 1.8 Netherlands 1.5 2.9 2.1 2.0 Belgium 1.5 2.5 1.7 2.0 Norway 2.5 2.2 2.7 2.5 Denmark 3.6 3.0 2.1 2.1 Portugal 0.4 1.5 1.2 1.5 Finland 2.9 5.1 2.7 2.6 Spain 3.5 3.5 2.9 2.6 France 1.2 2.3 1.7 1.6 Sweden 2.7 4.0 2.9 2.8 Germany 1.1 2.5 1.5 1.6 Switzerland 1.9 3.0 1.8 1.8 Greece 3.7 4.0 3.4 3.2 UK 1.9 2.6 2.5 2.7 Ireland 5.5 5.5 4.8 4.7 Eurozone 1.5 2.6 1.8 1.8 Italy 0.1 1.7 1.3 1.4 EU (25) 1.7 2.7 2.0 2.2

UK Economy Key Forecasts GDP growth to improve from 13-year low of 1.9% in 2005 to 2.6% in 2006. Seen at 2.5% in 2007 & 2.7% in 2008 Consumer spending upside to be limited by major headwinds. Exports likely to soften from robust H1 levels. Business investment healthy but firms cautious Bank of England key interest rate to rise to 5.00% in Q4 2006, then remain at that level through 2007 Housing market has regained momentum + there is a risk it could overheat.

Thank You! Howard Archer Country Intelligence Group Global Insight