German Economy Watch: German Retail Sales February 2008

Tuesday, April 1, 2008

German Retail Sales February 2008

Retail sales in Germany had their biggest month on month fall in almost a year in February as faster inflation eroded consumer spending power. Sales, adjusted for inflation and seasonal swings, fell 1.6 percent from January, the Federal Statistics Office in Wiesbaden said today. That's the biggest drop since May 2007.

According to provisional results of the Federal Statistical Office, in February 2008turnover in the German retail trade was in money terms 2.4% larger and in real inflation adjusted terms 0.3% smaller than in February 2007. There was even one extra shopping day in February 2008 - 25 - as compared with February 2007 - 24.

When adjusted for calendar and seasonal variations, February retailturn over was in nominal terms 0.7% and in real terms 1.6% smaller than that achieved in January.

Taking the last two months together and comparing with January-February 2007 retail turnover was up in nominal terms by 2.4% and exactly equal in inflation adjusted real terms to the turnover achieved in the first two months of 2007. If we look at the chart for the seasonally adjusted monthly index we can see that the general trend since March/April of 2007 has been steadily downwards, which is just another way of saying that the German economy is now almost completely dependent on exports (and the capital investment necessary to be able to produce them) for obtaining economic growth. So it seems a little hopeless to imagine that at this point a recovery in domestic consumer demand is going to sustain the economy should exports start to flag.

German policy makers who may have been relying on consumers to help fuel growth as a U.S.-led global economic slowdown may ultimately threaten exports, will find these results very disappointing. While consumer and business confidence all rose last month and as falling unemployment should in theory help support consumption, inflation running close to the fastest pace in 12 years is surely starting to impact on consumer spending power.

German consumer prices, as measured by the harmonized European Union method, rose 3.2 percent in March. European inflation hit 3.5 percent in March, the highest level in almost 16 years, the European Union's statistics office in Luxembourg said yesterday.

If we look at the PMI chart (the PMI gives us a slightly different, and more "as it happens", reading on retail sales, we should note that even though retail sales have been hardly spectacular in the first three months of this year, they are also hardly collapsing, and the March reading suggests they will hold up at least one more month. This reading is consistent with a lot of other data we are getting at the moment, and does suggest that even though consumption will not drive growth, at least it mirrors the underlying "push" which is still being sustained in the exports and the industrial production areas.

Sales of food, drink and tobacco fell 4.1 percent from a year earlier, sales at supermarkets and department stores declined 4 percent and specialty food-store sales declined 5.9 percent. In February, non-food retail sales gained 2.8 percent from a year earlier, with the biggest increase -- 7.4 percent -- in sales of clothes, shoes, textiles and leather goods in specialty stores. Sales of appliances and furniture rose 2.8 percent, the statistics office said.

GfK AG, the Nuremberg-based consumer research company, said March 27 that if inflation doesn't abate, German consumer-spending growth may fall short of its 1.5 percent forecast.

``Should the inflation rate remain significantly above 2 percent this year and therefore stay higher than initially assumed, then private consumption will only increase by up to 1 percent this year,''

Even so, GFKs consumer confidence index rose for the first time in three months in April as continuing employemnt growth appeared to havve boosted households' willingness to spend. Germans' income expectations and a gauge measuring their optimism about the economic outlook rose, according to the index.

The March jobless rate fell to 7.8 percent, the lowest level since August 1992, the Federal Labor Agency said today.

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Germany At A Glance, January 2008

Welcome to the German Economy Watch Blog. Below you will find the normal chronological blog posts. But first we would like to present some charts which provide background data and which we hope will help the first time reader better assess and get to grips with the argument being presented here. The big question which arose concerning the Germany economy in 2007 was whether or not the new found dynamism in German economic activity constituted some form of remaissance, and formed part of a global decoupling process whereby a sustainable recovery in domestic demand was taking place. Analysts on this blog never really accepted this view. The key question and central enigma associated with the German economy is really why domestic demand should have remained so congenitally weak over such a considerable period of time. Since this phenomenon is also to be observed in the the two other societes with very high (circa 43) population median ages - Italy and Japan - we postulate that demographics and population ageing processes offer some part of the explanation here. Basically what we can observe as societies move above the 40 median age mark are a number of stylised facts. Weakness in domestic private consumption would be one of these, absence of consumer credit driven property booms would be another, growing pressure on the national debt as the elderly dependence ratio steadily rises would be another, and growing dependence on export growth for sustaining GDP growth would be the central feature of the whole edifice. We hope you will find the background data presented here useful in assessing the argument which we are presenting on this blog, which is basically that a key component in the longer term growth stagnation from which Germany is suffering has its roots in the underlying demographics. Basically and in the long run (possibly with a 30 year lag) fertility does matter. Please click on thumbnails for better viewing.

What now follows which will be a very rough and ready attempt to describe in broad brush strokes how the contemporary German economy actually works. First off, and as is well known, German society is ageing, and at the same time the German population has started declining. Not only is Germany's median age rising, the proportion of the population in the key 25-49 age group is now falling.

As can be seen from the chart this crucial age group touched its highpoint in 1997/98. This could be thought of as the moment of maximum capacity for the German economy since it includes the crucial 25 to 40 household-former, first-time-homebuyer group. In terms of credit expansion, it is this group which drives a significant part of internal demand.

The age group also includes another important group, the 35 to 50 years one. This group drives an economy in productive terms, since these are the prime age workers. 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, without addressing underlying issues either through fertility or immigration, it can only move forward more and more slowly. Consumption becomes flat, and GDP growth - gioven the external dependence - fragile.

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 from 1975 to 2000hovered around the 22 - 24% of GDP mark.

Prior to 1975 GFCF was at a much higher level, while post 2000 it has dropped substantially And So what we can see is that the year between, say, 1975 and 2000, when GFCF remaind a more or less constant share of GDP, constituted - 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

And especially 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, it isn't very balanced, and there certainly isn't a steady state.

2008 Forecasts: There is a consenus at the present time that the German economy is slowing. Where there is no real consensus is over the rate at which it is slowing and where and when it will settle. It is clear that GDP growth in 2007 will be below the heady 3.1% annual rate achieved in 2006. The OECD last December revised their 2007 German forecast down to 2.6%, and their 2008 one down to 1.8%. The IMF in their October World Economic Outlook forecast growth for 2007 at 2.4%, slowing to 2% in 2008. Morgan Stanley's Elga Bartsch, while optimistic that the German economy will whether the credit crunch better than most (and here she may well be right) is somewhat more sanguine, putting 2008 growth at 1.5%. In general though I rather doubt her overview that "Germany could well be on the way to becoming the new growth locomotive in Europe." and especially her suggestion that "the phase of underperformance in terms of GDP growth, which has plagued Europe’s largest economy for years, is clearly over." Unfortunately, what we are arguing on this blog is that Germany's GDP growth rates since the mid 1990s are not some special kind of "underperformance", but what can be expected from a society with a rapidly rising median age which is increasingly dependent on exports rather than domestic consumption for growth.

The EU commission in it's November 2007 forecast was also convinced that the German economy was now on a "solid growth path", forecasting 2.5% growth for 2007 and 2.1% for 2008. I personally will be very surprised if we see growth in the region of 2% for the German economy in 2008, and I even consider the 1.8% from the OECD and 1.5% from Morgan Stanley still on the high side given the extent of downside risk. Basically the reasonably favourable depreciation rules which currently apply to German investment have been changed as of 1 January 2008, and we might reasonably expect to see some sort of impact on investment comparable with the negative shock which hit private domestic consumption following the VAT rise on 1 Jan 2007. In addition all the indications suggest that German consumption will continue to be weak in 2008. So if consumer consumption is at best flat, governemnt consumption equally so, and investment and construction weakening, we are simply lefy with export growth, and here the outlook is definitely more negative in 2008 than it was in 2007. The Spanish economy (one important German customer) is visibly wilting by the day, as is the UK (another big customer), but it is to Eastern Europe we must look for the biggest impact on German exports of any correction in 2008. Just one data point should suffice, Germany exports roughly the same value of goods to the Czech Republic (and more to Poland) as it does to China. This means that Geramny is proportionately not that exposed to any slowdown in China, but hugely exposed to any sudden shift in growth and demand in the East of Europe.

So I would say, that on current data, 1% growth in Germany in 2008 look a reasonable estimate at this point, but that this needs to be taken to mean with considerable downside risk. Germany is now tremendously dependent on what happens elsewhere, and until what does actually happen elsewhere becomes clearer it is difficult to be more precise on Germany. The only apparent bright spot on the horizon is employment, but I am dubious that in the context of Germany's ageing workforce this will work through as some are hoping, as I expain at some considerable length in this post here. My opinion is that Germany will enter recession at some point during 2008, and that we may well have 2 consecutive quarters of negative growth. The continuing high euro will maintain pressure on German exports, and high oil and food prices will maintain pressure on the inflation front, at least in the first half of 2008. The ECB will probably switch stance towards rate reductions at some point, but since, as Elga Bartsch among many others so eloquently argues German internal consumption and investment are not especially dependent on credit conditions, easing from the ECB may not have as much impact as one would hope for.