Merkel's Forecast to be Further Realized With Finalized GDP Estimate (Euro Open)

A third straight quarterly contraction in the German economy is expected to be confirmed tomorrow with the release of the final Gross Domestic Product estimate for the first quarter of 2009. It is likely that the number will further vindicate Chancellor Angela Merkel’s forecast of a 6% decline in aggregate output for the world’s fourth-largest economy in 2009.

[U][B]Key Overnight Developments[/B][/U]

[B]• New Zealand’s Trade Deficit Shrank a Fifth Straight Month
• RBA Director McKibbin Doubts Stimulus Power[/B]

Critical Levels[/B][/U]

Forex markets were slightly more volatile than in the previous day as market participants returned from their respective holiday to offer and bid their way through [B]Euro[/B] selling. Indeed, the 16-nation currency faltered slightly against the [B]Dollar[/B] in mid-session trading. Price action on the [B]British Pound[/B] continued to mimic much of the Euro’s movements.

[U][B]Asia Session Highlights[/B][/U]

New Zealand’s [B]Trade Deficit [/B]shrank for a fifth straight month in April as the demand for goods produced abroad continued to dwindle. The gap between imports and exports shrank to NZ$4.1 after demand from Asia dropped nearly 10% and imports from Europe fell NZ$176 million. Declining imports might have come on the back of a deflationary environment which saw producer prices decline by 2.5% in the first quarter. As the price of raw materials from abroad declined, the import metric would have naturally followed suit.

The debt generated by stimulative government measures will hamper the economy’s ability to grow, says [B]Reserve Bank of Australia[/B] director [B]Warwick McKibbin[/B]. In statements to The Australian, the board member also said that the country should look toward China as a reliable fuel for growth. Demand for Australia’s minerals and natural resources from the Asian country will act as a natural driver of export led growth for his country, McKibbin said. Running large deficits would reduce the availability of private funds to finance new investments, he stated. “The danger is you add too much fiscal deficit,” he added. Indeed, “most fiscal policy doesn’t do anything except switch spending from one period to another,” the RBA director said. “When you change fiscal policy, all you do is stimulate the economy today out of future possible growth,” he added.

McKibbin’s statements deviate from the general consensus of the the board, which feels that the combined effect of both monetary easing and fiscal stimulus has began propping the economy. In fact, April saw some of these positive signs. The unemployment shocked many people after it unexpectedly dropped by 0.3 percentage points. Spending got a huge boost as retail sales rose more than four times larger than that which was expected.

[U][B]Euro Session: What to Expect[/B][/U]

Germany’s final [B]Gross Domestic Product[/B] estimate is expected to confirm the country’s steepest plunge since the government began recording this statistic in 1970. The world’s fourth-largest economy most likely contracted for the fourth consecutive quarter in the first three months of 2009. The final estimate,comes two weeks after the preliminary one saw the non-seasonally adjusted figure display a bleeding German economy that shrank -6.7% in the 12 months through the end of March. When taking into consideration periodic events that occur on a seasonal basis, the figure is expected to come to a more optimistic, albeit still dreaded, -3.8%. This key data directly aligns itself with Chancellor Angela Merkel’s forecasts calling for a 6% contraction in her country’s economy this year. Recent comments by [B]Jochen Sanio[/B], Germany’s chief financial regulator, painted a possibly gloomier picture. In them, he said that the toxic debts on the balance sheets of many of his nation’s banks are “like a grenade” which are ready to explode if a series of “brutal” downgrades of mortgage backed securities by the rating agencies occurs. Perhaps these recent developments may spook consumers enough to reduce the [B]GfK Consumer Confidence[/B] survey downward rather than allowing it to remain flat.

Euro-Zone [B]Current Account [/B]data for March will likely continue to remain in negative territory. It may, however, gain a bit of strength as trade data showed an improved balance between exports and imports during the month. Income from abroad may have significantly toned itself due to the surge in emerging market equities in March. Much of this may have bode well for European income generation from abroad.

Switzerland’s [B]Employment Level[/B] in the year through the first quarter of 2009 is expected to have declined for the first time in nearly six years during a trend in which the nation’s unemployment rate either rose or stood steady for nine consecutive months. This three month lag in the data may, however, not necessarily be indicative of the near-term outlook. April saw Switzerland’s consumer prices rise by the largest amount in nearly two years. The realized number beat expectations by 0.3 percentage points. Some of this inflationary increase may have been due to the slowing rate of labor market weakness; afterall, March’s rate of unemployed remained even.

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