A pair of consumer sentiment readings for Germany and Italy will focus the market’s attention on how the economic outlook is holding up in Europe in the wake of the Russia-Ukraine crisis. Later, the US publishes numbers on new orders for durable goods, which will test the widely held view that weak growth in this year's first quarter will revive in the months to come.
Germany Gfk Consumer Climate Index (07:00 GMT)
Yesterday’s Ifo survey of the mood in Germany’s business sector was generally stable in the March reading of current conditions vs. the previous month. The news suggests that companies aren’t overly concerned about the potential for economic blowback from the Russia-Ukraine crisis, at least not yet. But looking ahead, the corporate sector “expressed far less confidence in future business developments,” Ifo reported.
How does consumer sentiment compare? Today’s release will provide an answer. In the last update, Gfk observed that the mood among Germans remained upbeat in February. “Consumers continue to regard the German economy as being on a path to recovery,” the research firm noted. “Willingness to buy almost remained at its already very high level and only dropped slightly.”
Will the optimism survive the geopolitical turbulence blowing in from the east? It's safe to assume that there'll be a price to pay eventually. With the sanctions noose tightening around Russia, the macro pain is sure to rise all around. "We remain ready to intensify actions including coordinated sectoral sanctions that will have an increasingly significant impact on the Russian economy, if Russia continues to escalate this situation,” the G7 nations said in a statement on Monday.
The main threat for Germany is bound up with the potential loss of Russian energy supplies, an analyst at Euromonitor International recently explained. By contrast, the commercial fallout is expected to be relatively minimal. Although Germany is Russia’s primary trading partner, “losing Russia as a market would not cause too much damage to Germany’s economy or one particular industry,” Giedrius Rudis wrote earlier this week. That sounds reassuring, but will consumers remain hopeful? Today’s Gfk release will provide the first installment on what's destined to be an evolving answer as the crisis unfolds.
Italy Consumer Confidence (10:00 GMT)
Europe’s third-largest economy comes into focus again today with an update on consumer confidence. As with Germany’s numbers that are released earlier, the economic news from Italy will be filtered through the lens of the deteriorating state of relations between the US/Europe and Russia.
Before geopolitical risk became an issue, there were tentative signs that the mood in Italy’s consumer sector was stabilising at moderately higher levels compared with the first half of 2013. The explanation has been that a degree of economic recovery was starting to kick in (last year’s fourth-quarter GDP was positive for the first time in two years). The trend wasn’t particularly convincing, although it was certainly welcome. But consumer confidence slipped in February, raising questions of whether Italy’s tepid recovery is sustainable.
The Russia factor only adds to the uncertainty. It doesn’t help that the hard data on retail spending slumped in December. Yet the relative stability in the government’s confidence index (a benchmark that reflects more recent data) implies that consumption may firm up a bit in today’s January release for retail sales (published an hour earlier, at 09:00 GMT). But with geopolitical risk bubbling, the current climate doesn’t look especially productive for a wobbly economy that's facing a steep uphill battle even under ideal conditions.
If the outlook is stronger than it appears, perhaps we’ll see the evidence in today’s sentiment and spending releases. Unfortunately, the latest estimate of retail spending via Markit’s purchasing managers index for Italy points to a setback. This benchmark continued to signal contraction, and at a faster rate. “Although the health of Italy’s economy generally looks to be improving, conditions in the retail sector evidently remain difficult,” a Markit economist noted in the March PMI report.
US Durable Goods (12:30 GMT)
The winter may have slowed the economy, but the all-important consumer is still optimistic that growth will pick up. That's the main takeaway in yesterday’s sentiment report from the Conference Board. “Consumer confidence improved in March, as expectations for the short-term outlook bounced back from February’s decline,” said the group’s director of economic indicators.
The public may be willing to give the economy the benefit of the doubt for now, but how does the business sector compare? Today’s news on durable goods orders for February will drop some fresh clues. Although the data in this report lags the sentiment numbers from the Conference Board, economists still think that the weather-challenged month of February witnessed stronger demand for big-ticket items. The consensus forecast calls for a 1.0 percent gain in orders last month vs. January in the headline comparison. If so, that would mark the first monthly rise since last November. Even so, one number doesn’t mean much in the grand scheme of the US economy. But a positive report today for this cyclically sensitive indicator would boost the case for thinking that the macro trend will improve.
In fact, there's a fair amount of optimism among dismal scientists generally. “Conditions in a variety of areas — including labour, consumer, and housing markets — are expected to improve over the next two years, while inflation remains tame,” the president of the National Association of Business Economics (NABE) said in connection with a new survey of economists. Today’s news on durable goods will be a reality check for deciding if that’s still a reasonable forecast.