German Business Confidence Steadies, While UK Shortfall Widens On Decline In Tax Receipts

German business confidence remained unchanged in May, after dropping in the precious two months, yet it exceeded expectations on rising exports which enhanced growth.

Business climate indicator lingered at 114.2 from expectations of 113.7. Current assessment gauge rose to 121.4 from the prior 121.0 and expectations gauge dropped to 107.4 from 107.7 in April.

In March confidence fell after the devastating Japanese quake while it fell in April on the rising fuel prices, yet the German economy proved to be strong, as indicated by the first quarter GDP data.

German growth remained unrevised in the first quarter, where the largest economy in the euro area continued to uplift growth in the region as it reported 1.5% expansion in the first three months of the year in the first three months of the year, almost quadrupling from the previous quarter’s 0.4% expansion.

Details showed that growth was triggered by the rise in exports by 2.3% from the revised 1.8% despite the euro's rise in the first three months of the year.

However, last week the Bundesbank said that the pace of expansion would calm down over the coming few months. Yesterday, German manufacturing expansion also slowed to 58.2 in May from 62.0 in April and services gauge dropped to 55.4 from 56.7.

Meanwhile, the main concentration is on solving debt problems in the region, especially in Greece. The Greek government decided to adopt an accelerated asset-sale plan and a new round of 6 billion euros budget cuts to avoid soft debt restructuring. In addition, the Cabinet announced extra budget cuts of around 2.8% of GDP to reach the 2011 budget deficit target of 7.5% of GDP.

The Greek government action came after Fitch lowered Greece's credit rating by three levels to B+ from BB+, keeping the door opened for further cuts, while revealing that the “soft” debt restructuring which is under review by European officials would provoke a default.

Not only Greece is under threat, but also other European economies such as Italy as Standard & Poor’s cut its outlook to negative and mentioned that its credit rating is may be prone to a downgrade.

Moving to the UK, the situation is also not good as Moody's said that 14 banks are under review for possible downgrade, where the country is passing through an embarrassing phase the government has to boost growth while curbing inflation and lowering budget deficit at the same time.

Today's data showed that net borrowing was 10 billion pounds relative to 7.2 billion pounds a year earlier, the largest budget deficit for any April since at least 1993. The high shortfall was attributed to the drop in tax receipts to fell and spending surged.

In addition, UK public finance deficit shrank to 3.3 billion pounds in April from the prior deficit of 25.3 billion pounds, above estimates of 2.5% deficit. Public sector net borrowing for the same month also showed a narrowed deficit to 7.7 billion pounds from revised deficit of 15.6 billion pounds, higher than forecasts of 4.4 billion pounds deficit.

Government proceeds slipped 0.8% last month while spending soared 5%. However, the watchdog expects the deficit to reach 7.9% of GDP in the fiscal year starting in April from 9.6% in the year ending March.

The sharp spending cut by the government is predicted to cut jobs, thereby raising unemployment and shaving growth prospects which are prompting policy makers to keep interest rate low to boost the uncertain recovery.

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