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Sunday, January 6, 2008

German Economy Outlook Entering 2008

Evidence of a growing slowdown in the Eurozone economies continues to show up across the board. German retail sales, for example, fell for the third consecutive month in December according to the Bloomberg purchasing managers retail sales index released at the end of December. The index came in at a seasonally adjusted value of 44, compared with 43.6 in November. A reading below 50 indicates contraction. Retail sales across the entire 13 nations euro bloc also declined in December with sales falling in France for a third consecutive month (the December index came in at 49.1), while a Italian sales dropped to 44.7 from 45.3.

The purchasing managers index for the euro zone manufacturing sector also eased up in December to a give a final reading of 52.6, down slightly from 52.8 in November. The December figure was revised up slightly from the earlier flash reading of 52.5. The manufacturing PMI for the whole zone managed to remain above the October low of 51.5, but the December reading is nonetheless the second weakest figure since Aug 2005.

In Spain the evidence for a sharp slowdown is quite general now, and only in France does the economy continue to show some level of resistance to the general downward march.

German households have evidently been reining-in spending recently after rising oil and food prices pushed inflation to the highest in 12 years last month. Economic growth in Germany is slowing as the global expansion ebbs and the euro's rise to a record crimps exports.

Germany's IWH institute, which helps provide twice-yearly reports for the government, on Dec. 20 cut its growth forecast for 2008 to 1.7 percent from 2.5 percent. In 2007, the economy probably expanded 2.5 percent, Halle-based IWH said.

German consumer prices, measured using a harmonized European Union method, rose 3.3 percent in November from a year ago. That's the most since the data were first compiled in January 1996.

Retailers' gross margins showed the sharpest decline since January 2006, with a gauge falling to 39.4 from 42.5 in November, according to NTC economics who prepare the retail sales index. The indicator measuring the average prices of goods purchased for resale increased to 70.4 from 69.9 in November.

In December, retailers also failed to meet their sales targets, with a gauge which measures this rising slightly to 38.5 from 37.2 in November according to the report. Companies also expect sales to miss projections in early 2008. An indicator measuring future sales dropped to the lowest in a year.

``Consumer confidence remained low despite increased marketing efforts by retailers,'' NTC said in its analysis. ``Worries about a wider economic slowdown and uncertainty in the financial markets heading into the New Year were highlighted.''

Euro zone purchasing managers surveys for the manufacturing sector also tend to confirm the idea that the economy of most member states has slowed is likely to have slowed in the fourth quarter despite what seem to be pockets of resistance in some countries.

As I indicated above eurozone manufacturing is weakening, and Germany is no exception here. The German PMI eased slightly - and as can be seen from the chart below is way down on the very strong readings earlier in the year. The index did hold up rather better than many expected, slipping to 53.6 from 53.7.

The general trend can also be seen from the monthly index of industrial output prepared by the Bundesbank and released by the Technology Ministry:

Basically German industry was growing strongly from April 2006 to May 2007, since which time it has been growing much more slowly, and during the period from August to October it was virtually stationary.

If we now turn to construction, we can see the marked slowdown in 2007, which has everything to do with a euphoric boom in 2007 (part of it fuelled by the pre VAT increase activity, but more generally by the "at last we have a domestic decovery in Germany" mood, a mood which is now grinding itself down on the rocks - not of Rügen - but of its own disappointment.

This view is confirmed if we look at the data on new building permits from the Federal Statistics Office.

As we can see, these have been down sharply all year - in fact the Federal Statistics Office estimates that the total number of buildings authorised January - September 2007 was down 31.4% - and there is precious little sign of recovery, and given the credit conditions now operating in relation to all forms of construction it would be unwise to expect any early turnaround. If we note, in September - which is the last month for which we have data at present, there is even a slight drop. It will be interesting indeed to see whether this in fact continues.

According to provisional results of the Federal Statistical Office, turnover in retail trade in Germany in October 2007 was in nominal terms 1.0% larger and in real terms 0.6% smaller to that of the corresponding month of the previous year. The number of days open for sale was 26 in October 2007 and 25 in October 2006. When adjusted for calendar and seasonal variations (CENSUS-X-12-ARIMA), the October turnover was in nominal terms 2.9% and in real terms 3.3% smaller than that of the preceding month. Compared with the corresponding period of the previous year, retail turnover was in the first ten months 2007 in nominal terms 0.8% and in real terms 1.6% smaller than that in the first ten months of 2006.

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