LONDON, 9 June 2003 — I wish to start with an outlook in European Industries. In order to give you the first indication of the post-war industrial sentiment in the euro area, we have a look at the Belgium index of business confidence, acting as a leading indicator.
After an extreme weakness in March and April, the National Bank of Belgium (BNB) index recovered somewhat in May. The rise in confidence, which was mainly driven by an improving sentiment in the manufacturing sector, is a positive signal for the region but not enough to point to an imminent recovery, which we expect to start at the earliest in the second half of the year. In order to be confident that industrial sentiment has improved for the whole euro zone, we would like to have a confirmation that the German IFO index has also recovered.
And in fact, the West German IFO business climate index increased more than expected from 86.6 in April to 87.6 in May. The rise was entirely driven by expectation, while current conditions edged down slightly. The IFO institute also said that the improvement in the business climate was mainly concentrated in the retail sector, but manufacturing and wholesale also brightened a little in May. The only area where confidence fell was construction. Overall, the May IFO report does not yet signal a turn around in the German economy. We would need to see a rise in current conditions before we can talk about a turnaround in activity. But the chances of an upturn in the second half of the year have risen.
In all, the moderate bounce in the BNB and the IFO supports our view that the situation in the euro area is not deteriorating further in Q2, but it is moving sideways. That said, to be sure that the current weakness is not cumulating into a mild recession, we would also need to see an improvement in the Purchasing Managers Surveys and the other economic figures to be released in the coming weeks.
In the US, consumer confidence showed improvement and had increased in May suggests that consumption will grow by 2 percent. The expectations sub-index increased strongly, whereas the present condition index reduced slightly. The fall in the present conditions results from more surveyed households responding it is hard to get a job. The rise in the expectation results from more households expecting the labor markets to improve.
The further development of consumer confidence and hence private consumption depend on whether the positive employment expectations will come true.
On the Labor front, in the past, employment expectations from private households resulting from the Conference Board consumer survey were a leading indicator for the future development of employment. However, the newest reading of employment expectations of consumers points to a 6-month growth of non-farm payrolls of 1 percent.
Based on the above, we can conclude that:
Since the end of March the major equity markets (S&P500) gained more than 10 percent
The macroeconomic indicators improved, but hardly justified the price gains on the equity markets The equity risk premium is quite high; hence, we are waiting for a clearer chart-technical picture. More broad based better macroeconomic figure and better news from companies are also key for increasing our equity exposure.
(Habib F. Faris is vice president at Clariden Bank, London)
(The information contained herein is for information only and should not be construed as an offer or a solicitation to purchase, subscribe, sell or redeem any investments. While Clariden Bank uses reasonable efforts to obtain information from sources, which it believes to be reliable, Clariden Bank makes no representation or warranty as to the accuracy, reliability or completeness of the information)
