With the US heading for recession, the European Commissioner for Economic Monetary Affairs could be forgiven for lauding the strength of the European economy when he unveils his spring economic forecast on Monday.
But gloating over the problems on the other side of the Atlantic should be the last thing on the mind of Joaquin Almunia, given the fall in German business confidence highlighted by the IFO index this week. The German economy has been one of the success stories of the last year with exports booming despite the strong euro, but if things are about to get difficult, then the forecast for 1.8 percent growth in the EU for 2008 will have to come down.
The UK is clearly heading for trouble with the housing market struggling. Italy remains the sick man of Europe and Silvio Berlusconi’s new government is unlikely to change matters. French growth is holding up well, but for me the big problem is Mr. Almunia’s own country: Spain.
Economic confidence in the former star of the European economy is at a 14-year low, and with the housing market looking like it is about to fall off a cliff, even a €10 billion fiscal stimulus package is unlikely to stop a significant slowdown or potentially a nasty recession.
Unemployment jumped on Friday, and Spain’s business lobby warned last week that the country is falling rapidly into stagflation. With the ECB looking less and less likely to cut rates as inflation rises, I think they are probably right.
At 8:00 CET on Monday, we will get earnings from Spanish banking giant BBVA. Net profits are expected to rise by 13.8 percent because of strong growth in Latin America, but lending in Spain is likely be very weak. The Spanish credit group ASNEF says personal loans fell by 30 percent in the first quarter, the worst performance since the economic crisis of the early 1990’s. Mortgage lending is also likely to be weak, and the bank's recent attempts to diversify its portfolio with deals in Texas and the purchase of a stake in China’s CITIC may have been badly timed, given problems in the US and the bear market in Chinese shares.
Finally, French Finance Minister Christine Lagarde will be outlining her latest attempts to modernize the French economy on Monday. CNBC Europe's Stephane Pedrazzi has secured an interview with Madam Lagarde and will be pushing her on how she plans to challenge London's position as the financial capital of Europe. I am a big fan of the French Finance minister ever since she scolded me at the World Economic Forum in Davos for not putting my coat on despite freezing temperatures, but she needs to be realistic. There is a reason over 200,000 French people work in London: It is the undisputed financial capital of Europe and will remain so.