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Thursday, September 27, 2007

German Retail Sales Continue To Fall

The data for August retail sales for Germany were released by the Federal Statistics Office at the end of last week:

WIESBADEN – According to provisional results of the Federal Statistical Office, turnover in retail trade in Germanyin August 2007 was in nominal terms 1.2% and in real terms 2.2% smaller than that of the corresponding month of the previous year. The number of days open for sale was 27 in August 2007 and 27 in August 2006, too.

When adjusted for calendar and seasonal variations (CENSUS-X-12-ARIMA), the August turnover was in nominal terms 1.1% and in real terms 1.4% smaller than that of the preceding month.

Compared with the corresponding period of the previous year, retail turnover was in the first eight months 2007 in nominal terms 0.9% and in real terms 1.6% smaller than that in the first eight months of 2006.

Here's a chart of the monthly index since January 2006:

And here are the monthly year on year changes.

Incidentally, I really don't see how anyone could have been so silly as to argue that a 3% increase in the VAT consumption tax would have no impact on domestic demand, the effect is evident even to the naked eye, isn't it?

Wednesday, September 26, 2007

German Business And Consumer Confidence Tumbles

Well following hot on the heel of my German export driven economy post yesterday, events didn't take too long in bringing themselves home to roost.

Firstly we have the IFO Business Climate Index:

The index for the Munich-based Ifo institute which is normally though to act as an early indicator of likely trends in German economic activity, fell for the fourth consecutive month from 105.8 in August to 104.2 for September. Expectations for the next six months were the gloomiest for almost two years, as the component measuring confidence in the economic outlook six months from now fell to 98.7, which was the lowest level recorded since November 2005, and down from 100.4 in August. Indeed this months general business climate reading was itself a 19-month low, and reflected growing concerns among German industrialists that the strength of the euro and the increasing cost of credit will sap economic growth. The IFO results are entirely in harmony with the Bank of Scotland PMI readings we saw earlier in the week.

German consumer confidence also fell - in this case to the lowest level in five months - according to the GfK AG's confidence index for October. The index fell to 6.8 from 7.4 in September, the market-research company said in Nuremberg today.

The general concern is the same as that being expressed in the IFO index, the fear that Germany's economy may lose momentum as a U.S. housing slump pushes up borrowing costs and at the same time the euro's appreciation to a record against the dollar weighs on exports.

The individual components of the index also make interesting reading:

The component measuring consumers' confidence in the economic outlook fell to 40.7 from 48.4, while the income expectations component dropped to 2.3 from 9.2 and the indicator of households' willingness to spend slipped to minus 2.4 from 6.4. These are quite substantial drops, and reflect a growing pessimism about the outlook for the coming winter.

In this climate it is hard to appreciate why people imagine that the dollar can quietly pulmb the bottoms while the euro scratches the ceiling. A correction is undoubtedly coming here, since the current narrative makes no sense at all. The first indication of the change, well haven't you noticed, M Jean-Claude Trichet has gone very quiet all of a sudden. Somehow I don't think he relishes courting the limelight too much right now.

Tuesday, September 25, 2007

The German Economy, Employment, Export Shares and Age Structure

Ok, well yesterday I gave a brief resumé and outline of the state of the German labour market, about why the recent drop in unemployment isn't everything it seems to be, about why German wages have deflated, rather than inflated, during the current economic expansion, etc etc. That post is a prerequisite for what now follows which will be an attempt to describe how the German economy actually works.

First off, and as is well known, German society is ageing, and the German population is declining. Here is a chart - thanks to Claus Vistesen who has been doing this part of the work (and see also this very important recent post from Claus on DM) - of the German population evolution:

As can be seen, after the late 1990s the rate of population growth in Germany began to decline rapidly, and then more recently the population actually started to decline.

This changing population pattern has also been accompanied, as is again well known, by an important ageing of the population. This can be seen clearly from a chart - again from Claus - for German median ages:

Now this rapid recent rise in the median age of the German population makes Germany a much older society than many other OECD countries. In particular the United States is much younger (as are the UK, France, Ireland, Iceland etc) as can be seen from a comparable chart for US median ages (again thanks to Claus).

As can be seen the US is an incredibly young society, having attained median ages during the 1970s and 1980s more typical of a developing than a developed society, and even today the US is only where - in median age terms - Germany was some 30 or so years ago. So when we talk about "ageing societies" we should remember that while all our societies are ageing, some of them (Japan, Italy, Germany) are doing so much more rapidly than others. This difference in fact has profound implications, ones which were never foreseen, and given what we now know it should not be surprising to see these age structure differences expressed - as we will see below - in very different core characteristics in each of the societies concerned.

Now, not only is Germany's median age rising, the proportion of the population in the key 25-49 age group is now falling. Let's look at the chart:

As can be seen from the chart this crucial age group touched its highpoint in 1997/98. This could be imagined as the moment of maximum capacity for the German economy. This is the case for two reasons. Firstly the 24 to 49 age group includes the crucial 25 to 49 household-former, first-time-homebuyer group. In terms of credit expansion, it is this group which drives a significant part of internal demand, since this is the group with the greatest propensity to borrow forward, and this is vital.

The 25 to 49 age group also includes another important group, the 35 to 50 one. It is this group which drives an economy in productive terms, since these are the prime age workers. So if you think of a society as a 100 metres sprint athlete, then there is an age when this athlete is at the maximum of his or her running potential, an age after which each time they can only run the 100 metres more slowly. Well a society is the same in terms of its collective economic potential, after the 25 to 49 age group peaks an economy can only move forward more slowly, and logically, since without addressing either fertility or immigration, every time more and more slowly, as this group declines inexorably as a % of the total population.

Is there any evidence for this kind of assertion. Well, yes, as it happens, there is actually.

Lets have a look at German GDP. First off a long term chart.

As we can see, and as is well known, German GDP growth has been very weak since the turn of the century. As is also well known 2006 was a very good year for the German economy, which is what lead all the commentators to cry - at last! There is a German recovery. But have they been too quick in drawing this conclusion? There are good reasons to think that they may well have been (and of course, in reality we are all about to find out as we go through the coming winter). Let's have a look at the evolution of the composition of German GDP over the years.

Now, there is a lot to be seen in this chart for the careful observer. The first thing that strikes the eye is the way private consumption has hovered pretty close to the 60% mark for many years now, while government consumption - after moving sharply upwards as a total share in the first half of the 1970s has subsequently remained pretty constant, moving around the 19% of GDP mark. The big difference has been in the importance of fixed capital formation (GFCF) which reached a local peak around the 22 - 24% of GDP mark - guess when - just when the 25 to 49 age group was reaching its historic peak, in the years 1992 to 1995. So why should this be significant, well quite simply since fixed capital formation includes the HOUSING share, and it is this component which has steadily declined as a share of German GDP since the mid 1990s, and which is why there is a "hole" in German (and Japanese, which is the same story, only told a little earlier) GDP, a hole which can only be compensated for by exports. It is now interesting to ask whether in Spain, where the age group in question has just peaked, and the property market may be in the process of a historic bust, we may not soon see the same process at work.

So what we could propose is the idea that the years between, say, 1974 and 2000 (when GFCF fluctuated around a more or less constant share of GDP) constitute - to use the language of neo-classical economics - the constant growth period of the German domestic economy. The years prior to 1975 were the convergence, or "catch-up" years - especially those of the 1960s, after Germany finally broke out of the destruction and devastation of WWII - while the years after 2000 constitute what the neo-classicists would call the "balanced growth period", although as we can see, growth isn't very balanced, and there certainly isn't a steady state. This is because the ageing population components in German growth are now coming to dominate over the shifting age structure components of the constant growth period, and we are seeing an effect which is very similar to what is known as the "demographic dividend", only it is acting in reverse, which is why I call it the demographic penalty. Basically the majority of economists want to argue that what I have just said isn't the case, but I would simply suggest they look at the data, as I have been looking at it, and explain why it isn't the case, since the facts and the correlates seem pretty clear to me, once you "parenthesise" (or put in brackets) traditional steady state growth expectations and take a fresh look at the data. Simply saying that what is happening, isn't (the denial stage) since that won't change things, and it would seem to me to be more sensible to accept reality and to devise policies which try to address the real issues.

If we now move on to look at exports we also find something interesting. While fixed capital formation declined as a share of GDP from 24% in 1991 to 17.76% of GDP in 2006 (ie a 6% drop), the German trade balance moved from a DEFICIT (yes, you heard right, deficit) in 1991 of 0.4% to a surplus of 5.44% of GDP in 2006, ie a rise of 6 percentage points. The comovement in the two shares match each other in virtually symmetrical fashion. Incredible, and facsinating, isn't it? Here is the time series chart for the two components.

As I say, the correlation of these two since the mid 1990s is really quite striking.

Right two last charts just to finish up. Firstly annual private consumption growth in Germany (in percentage change terms):

As can be seen, this has been - barring the boom years of the mid 1990s - steadily declining in its ability to drive German growth, and it would be rather foolish to expect this to suddenly change now.

Lastly export growth and GDP growth:

As can be seen, since the mid ninetees, every time the German export performance flags GDP tanks. Claus and I haven't gotten round to doing the correlation coefficients yet (but we will do). But the relationship is pretty clear, so if the markets in the US and Eastern Europe slow noticeably this winter, just you watch what happens to German GDP.

So, as they say:

Quod Erat Demonstrandum

Or, if you prefer, "game, set, and bloody match". Anyone got some glasses handy, it's time to cork out the champagne I think. Or no, since this is Catalonia, a nice glass of Cava will do me fine. Have a nice day everyone. I will.

Monday, September 24, 2007

Employment and Unemployment in Germany

German unemployment fell for the 19th consecutive month in August according to figures released by the Nuremberg-based German Labor Agency earlier last week. The number of people out of work in Germany when adjusted for seasonal swings, declined 15,000 from July and hit the new recent low of 3.76 million.

Now, this seems like very good news indeed, doesn't. And of course it is. But is there more than just good news here? Perhaps there is, since, as we know, after 30 or so years of sub-replacement fertility the German population is now falling, so what about the labour force? Well maybe the first clue that all here isn't exactly as it should be can be found in this little admission tucked away in the press release from the German Federal Statistics Office:

Another positive impact on the labour market is exerted by a decrease in labour supply which, according to estimations of the Institute for Employment Research, will decline by 100 000 on an annual average in 2007.

Now fortunately the Federal Labour agency makes available monthly detailed statistics for the evolution of the German labour force, and it is to an analysis of this data that we will now turn.

Firstly the unemployment rate itself. Now there are various measures of this rate which you will find in current use, but whichever you look at it is plain that unemployment has been steadily coming down during the present expansion. In the chart below we illustrate this with the measure used by the Federal Labour Agency:

Now, if we come to look at the chart for the total numbers of those employed and unemployed (not seasonally adjusted) we can begin to notice some interesting details:

In the first place and clearly the number of unemployed has come steadily down. And the number of those employed has risen, although this is not such a clear picture, since the recent rise has only recovered the employment high-point which was achieved at the end of last year.

Now, if we come to look at a longer time series chart for the economically active and employed population in Germany, we will see immediately that - as indicated by the quote from the federal statistics office above, the economically active German population reached a high point in the third and fouth quarters of 2004, and since that time it has been trending down.

This is, of course, good news, if you work for the German Labour office (what is it they say - "Another positive impact on the labour market") and it is your job to find work for people since you will have less customers and hence less work to do, but it certainly isn't good news if your job is to generate a smoothly oiled economic machine capable of generating sufficient wealth to be able to sustain and support and adequate health and pensions system for all those members of that rapidly expanding over 65 age group. Also, and again as we can clearly see, the "massive job creation miracle" may have touched its ceiling sometime towards the end of last year. The German economy is now slowing, and it is not impossible that German employment will never again reach those giddy heights.

But there is another detail which should interest us here, and that is the type and quality of the work which is being created. Lets take a look at the data from the German Federal Labour Agency for those in work which is liable for the payment of social security contributions:

what we can see here is that the numbers of people in jobs which are liable to such payments reached a peak in 2001/02 and that subsequently it was declining up to the end of 2005. If we now take a look at a monthly chart since the start of 2006 we will get a clearer picture of the more recent situation:

What we will observe is that the trend has been rather upwards since the start of 2006, but that the total registered, at 26,880,000 is still significantly below the high point of 27,790,000.

I was in fact put on the track of all of this by an article a couple of months back in the Economist. They make the point in that article that Zeitarbeit, as temporary work is called in Germany, may only account for 1% of total jobs, but it does at the same time account for more than half of all those new jobs created in Germany the past year.

One example of the new breed of employers is time & more, which specialises in health care. It has around 400 people on its books, of whom 300 are nurses; two years ago it had 250. Its founder, Bernd Sydow, who sold his firm to Adecco in April, says that it supplies almost all Berlin's hospitals as well as hospitals in other big cities. Around three-fifths of time & more's nurses are called on for stints of one to three days, often at short notice. Having reduced permanent staffing levels and carrying no reserves, hospitals turn to the agency as their requirements fluctuate. Mr Sydow reckons that eventually about 5% of his clients' nurses will come from an external pool."

Now why is all this interesting. Well for two principal reasons. Firstly because of the most striking similarity with what has been happening in Japan (that other global leader in population ageing), and secondly for the light which all of this may throw on the evolution of domestic consumption in Germany. Basically the German jobs machine has been generating a large number of non-traditional and part time jobs, and these jobs are nothing like as remunerative as the traditional ones they have been replacing. There is nothing strange or even surprising in this, as Germany's workforce is ageing, and many of those in the over 50 age group who are seeking work may well find themselves working in just this sector.

As I say, the similarities with what has been happening in Japan are very striking here, and I do, of course, have a Japan blog, and you can find some of my arguments about what is happening to internal consumption, wages and the labour market in Japan on that blog.

Now, if we turn to the impact of all of this on German wages and salaries, then we will find that, naturally enough, and under the circumstances, they have not been rising anything like as fast as some imagined they would be, given the supposed "tightening" which was taking place in the labour market.

As we can see, the response of German wages and salaries to the "new economic revival" has been extremely muted, and this should not surprise us in the least if we think about the changing age composition of the German Workforce.

Sunday, September 23, 2007

German ZEW Economic Sentiment Index September

German investor sentiment on the outlook for the German economy worsened more than expected in September on worries about market turmoil and the strong euro.

The Mannheim-based ZEW economic research institute said its economic sentiment indicator, based on a monthly survey of 304 analysts and institutional investors, fell to -18.1 this month from -6.9 in August. The figure was the lowest since December 2006.

This report adds to growing concern that the collapse of the U.S. housing market will only push further down growth which was already slowing in some of Europe's core economies, Germany and Italy in particular. The European Commission on Sept. 11 lowered its forecast for German growth this year to 2.4 percent from 2.5 percent, adding that the fallout from defaults in the U.S. on mortgages aimed at people with a poor credit history had ``tilted the balance of risks to the downside.''