The View From Europe – They are Pessimistic as Well

Every now and again it is always good to obtain the European view of what is going on the economy. Well, they are worried. It is important to keep in mind that we are all in this boat together. Text in bold is my emphasis. From Bloomberg:

Investor confidence in Germany dropped to the lowest in almost 15 years in December as rising credit costs dimmed the outlook for economic growth.

The Mannheim-based ZEW Center for European Economic Research said its index of investor and analyst expectations fell to minus 37.2, the lowest since January 1993, from minus 32.5 last month. Economists expected a decline to minus 34.5, the median of 41 forecasts in a Bloomberg News survey showed.

The U.S. housing slump has pushed money-market rates to the highest in at least six years, adding to record oil costs and the strongest euro ever in hurting companies. Investors expect the credit squeeze to continue beyond the first quarter of 2008, the Bank for International Settlements said yesterday.

``The gloom reflects investors' concerns about the economy,'' said Gareth Claase, an economist at Royal Bank of Scotland. ``At the same time, don't forget that it is financial analysts filling in the forms. So their sentiment about their own industry may be exaggerated their pessimism.''

Borrowing costs jumped in mid-August as banks, including Bear Stearns Cos. and Merrill Lynch & Co., began to reveal losses on securities linked to U.S. mortgages aimed at people with poor credit histories. Losses from U.S. subprime mortgage foreclosures will probably reach $300 billion, the Organization for Economic Cooperation and Development predicted on Nov. 22.

The slump in global credit markets may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a ``substantial recession'' in the U.S., Goldman Sachs Group Inc. forecast on Nov. 16.

The cost of borrowing euros for three weeks rose to the highest level since at least October 2001 yesterday as banks sought funding over the year-end. The euro interbank offered rate, the amount banks charge each other for such loans, rose 4 basis points to 4.93 percent, the European Banking Federation said. That's 93 basis points more than the European Central Bank's benchmark lending rate.

Even so, ECB Executive Board member Lorenzo Bini Smaghi said yesterday that banks' concern that liquidity would dry up at year end is ``unjustified.''

The ECB ``can't come to the conclusion that there is a credit crunch'' in Europe, he said, although ``that doesn't mean there couldn't be a less favorable evolution going forward.'' (Wow, they have Fed speak in Europe too or is that just good old double-speak.)

RWI, one of four economic groups that advise the German government, last week cut its forecast for growth next year to 1.7 percent from 2.3 percent. The economy will probably grow 2.6 percent this year, the Essen-based institute said.

The euro's 11 percent advance against the dollar this year is making German exports less competitive abroad, adding to investors' concerns. Exports last year powered the country's 2.9 percent economic expansion, the fastest in six years.

Domestic demand may not offset a fall-off in foreign sales as oil-driven inflation is sapping consumer and company spending power. Last month, consumer prices rose 3.3 percent from a year ago, the most since records began in 1996. The price of oil has gained 44 percent this year.