Positions in Europe: Long Germany (EWG); Sweden (EWD)
As ash clouds from Iceland’s recent volcano eruption slowly drift into European skies (the UK already ground 250 flights) and discussions fly in every direction on a possible debt default/restructuring strategy in Greece (see yesterday’s European Risk Monitor post for our take), below we provide the most salient data points and charts out today in Europe:
1. Germany’s second reading of Q1 GDP was unchanged quarter-over-quarter and year-over-year at 1.5% and 5.2%, respectively. As the table below shows, Exports, Capital Investment, and Construction made significant gains. We continue to like Germany’s healthy 2011 growth profile of ~ 3.2% GDP and sober fiscal standing as a defensive play with the backdrop of persistent sovereign debt contagion across the Euro region. We’re also long Sweden (via the etf EWD) in the Hedgeye Virtual Portfolio with a similar thesis to Germany. However, Sweden enjoys an independent central bank (and currency), and has prudently hiked interest rates over the last 10 months to head off inflation.
2. Germany’s IFO Business Survey confirmed a developing trend of slowing confidence over the last months. [Additionally we’re seeing a similar trend across many western European countries. France’s Production Outlook fell to 15 in May versus 21 in April and Business Confidence slipped to 107 in May versus 109 in April, according to INSEE National Statistics Office of France].
As the chart below shows, the 6-month forward looking German Expectations (which we key off on in particular) declined month-over-month, and again we think is representative of the uncertainty surrounding the fiscal health of the region’s periphery.
3. UK Net Borrowing (Excluding Financial Interventions) was £10 Billion in April versus £7.3B a year ago. As Chancellor of the Exchequer Osborne continues to fight to curb spending and generate revenue to reduce the country’s deficit, the April figures show a -0.8% decline in revenue and 5% gain in spending. The revenue figure was affected by a one-off bank payroll tax that brought in £3.5 Billion last April, and the “relatively high bonuses being paid and share options being exercised,” according to the UK Statistical Office.
The deficit is expected to narrow to 122 Billion in the fiscal year that began in April, or 7.9% of GDP. Public Sector net debt at the end of April 2011 was £910.1 Billion (60.1% of GDP) up from £765.5 Billion (53.0% of GDP) at the end of April 2010.
We continue to be very cautious on the UK economy. Persistent inflation (CPI is currently at 4.5% Y/Y) is the most immediate term threat. The BoE has yet to clearly signal any concrete action to curb inflation's rise short of acknowledging it. We expect consumer and business confidence to wane over the intermediate term as growth prospects remain weak and the government sheds more public-sector jobs to reduce the budget deficit.