Aggregate hours worked contracted 8.7 percent at an annualized rate in the first quarter of the year after a 7.4 percent contraction in the fourth quarter of 2008. Historically, aggregate hours have been reasonably well aligned, albeit imperfectly, with GDP growth. The acceleration in the pace of contraction in hours contrasts with the common forecast for a moderation in the pace of contraction in GDP in the first quarter 's to -5.5 percent from -6.3 percent in that final quarter of last year.
If in fact GDP contracts at a faster pace than expected in the first quarter, it would most likely be concentrated in inventories, given the combination of stabilizing consumer spending and plunging production. Analysts estimate that consumer spending rose 1 percent at a seasonally adjusted annual rate in the first quarter after contracting at a 4.1 percent annualized pace in the second half of last year. The key question is whether the stabilization in consumer demand, which was a positive surprise on the forecasts, will persist in the second quarter, or whether it was a temporary bounce due to pent-up demand. Should spending remain stable, producers will finish working off excess inventories and cease cutting production and workers. If consumers pull back again, another round of production and job cuts will take place.
While there is much focus on how the euro area will be affected by the slump in global trade, it is important to also focus upon the trade slump within Western Europe itself. Data on intra-EU trade flows during the first quarter is still patchy 's only France has published February data, for example. However, it is worth noting that French exports to Spain in February fell 39 percent year on year 's a record slump. French exports to Portugal were down 35 percent year on year, to Italy, Poland and the U.K. they fell 30 percent, to the U.S. 29 percent and to Germany 13 percent. Although the January and February data is partially estimated, it is evident that the biggest hit to eurozone exporters is coming from within Western Europe.
The one positive aspect of this is that it does imply that a process of re-balancing is underway. In the past, many experts have argued that Europe had built up considerable imbalances within itself. In particular, on the one hand there was a large surplus (at its peak, equal to 2.7 percent of Western European GDP) of exports from the "northern" countries, which was largely counter-balanced by major deficits to the west, south and east 's and above all, in 'southern' Europe. In particular, Germany in 2007 had a current account surplus of 191 billion euros, and the Netherlands a surplus of 43 billion euros, but these surpluses were offset with a deficit of 105 billon euros for Spain, 54 billion euros for the U.K., 37 billion euros for Italy, 28 billion euros for Greece, 20 billion euros for France, 15 billion euros for Portugal, and 10 billion euros for Ireland.
However, the latest current account data signals that there is some correction in the deficits being recorded by debtor countries, which is not surprising given the constriction of international capital flows. This also reflects an intense period of domestic rebalancing. For example, in the fourth quarter of last year, the Spanish current account deficit, seasonally adjusted, was at an annualized rate of 93 billion euros, while in January it was 5 billion euros (non-annualized). At the same time, the German current account surplus is narrowing: in the fourth quarter of 2008 it was an annualized 129 billion euros, and in January and February this year it was at an annualized seasonally adjusted rate of 54 billion euros.
Russia and CIS
According to Russia's State Statistics Office, the country's Producer Price Index (PPI) was up 4.1 percent month on month in March, which translated in a reading of negative 2.8 percent year on year. The rise in producer prices was correlated with an increase in the price of Brent, which was up $3 per barrel on average during the month. Looking at the breakdown of March's PPI figures, it is observable that the monthly rise in prices was the highest in the production of oil and gas (29 percent month on month).
Meanwhile, prices in the manufacturing sector were virtually flat in month on month terms, while the producer prices of gas, electricity, and water rose by a more modest 9.1 percent month on month. It seems 's as evidenced by the absence of monthly rise in manufacturing prices 's the effects of the ruble's devaluation have petered out. Meanwhile, the gains in the extracting sector that benefited most from the ruble's devaluation appear to be eroding.
*** Written using materials from Bloomberg, Reuters, and Barclays Capital Economics Research