Germany's Economy May Shrink in Q2 2008

Germany's economy may shrink this quarter after expanding 1.5 percent between January and March according to Deputy Economy Minister Walther Otremba today.

Gross domestic product ``may even be negative'' in the three months through the end of June, Otremba told reporters in Berlin. Stagnation ``would be a good result.''

As we saw earlier this morning, German consumer confidence fell to 3.9 from a revised 4.7 in June, the lowest in more than two years.





Asked whether the euro's strength against the U.S. dollar is beneficial as it damps rising oil prices, Otremba said the single currency's gains ``are rather negative overall.'' Still, the euro's effect on oil costs are a ``positive side effect.''

And as may be remembered from the earlier data, the German economy started 2008 with what seemed on the surface to be considerable momentum since with GDP (on a price, seasonal and calendar adjustmented basis) rising by 1.5% in the first quarter over Q4 2007 (or an annualised 6%).



Economic growth in the first quarter was supported primarily by gross fixed capital formation, which continued to increase at a pretty rapid clip. Compared with the fourth quarter of 2007, investment in machinery and equipment was up by 4%, and capital formation in construction rose by even 4.5% owing to the comparatively mild winter.

Overall final consumption expenditure, increased by 0.5%, the first such rise in over a year, however breaking this down we find that government final consumption expenditure was up markedly (+1.3%), while the final consumption expenditure of households showed a smaller increase (+0.3%) against. Inventory building, on the other hand, added a substantial 0.7% points to growth in the first quarter. Exports continued to grow (+2.4%) but in fact since imports rose even more strongly (+3.5%), foreign trade actually had a downward effect on gross domestic product in Q1 2008 when compared with the preceding quarter (see chart below).



But the bottom line was that, when we come to look at the components of growth, of the 1.5% increase in q-o-q GDP, nearly half (0.7% points) was accounted for by a growth in inventories, while 0.4% was accounted for by a growth in construction which was in part the result of better weather in January and February and scheduled work being advanced (although you can't simply add these numbers since some of the construction work may well have accumulated in inventories), while the net impact of external trade slowed, and household consumption only accounted for 0.2% points.

So really at the end of the day it isn't really that surprising that some of this added "bonus" should now be clawed back in Q2, and especially when there is the impact of inflation on consumer purchasing to thing about.


The Federal Statistics Office will publish a report on second-quarter German growth on Aug. 14.

Germany GFK Consumer Confidence Index July 2008

GfK's index forward looking index for July 2008, which is based on a survey of about 2,000 people, declined to 3.9 from a revised 4.7 in June, according to the latest data released by the Nuremberg- based market-research company earlier this morning.



According to GFK spiraling energy costs and the threat of a further massive rise in the price of gas are increasingly dampening the consumer mood in Germany. Both economic and income expectations dropped for the second time in succession, and the same applies to the propensity to purchase. As a result, the consumer climate indicator for July is forecasting a value of 3.9 points after a revised 4.7 points in June. In light of an inflationary trend which seems to be establishing itself around the three percent mark, GfK has downgraded its previous 2008 forecast for private consumption in real terms from 1%, which was based on an anticipated rate of inflation of 2.5%, to 0.5%.




Economic Expectations


After losing almost 10 points in May the economic expectations indicator once again declined - by just under 6 points - and now stands at 7.5 points. However, this means that the indicator remains in the positive range, and is still above the long term average of 0 points. The crisis on the financial markets, which is evidently still far from over, the foreseeable cooling of the global economy, which is bound to hit the USA particularly badly, and fears concerning personal purchasing power are causing consumer optimism to wane. In addition, the continuing strength of the euro is likely to weaken the positive growth dynamic of exports.

Income Expectations

Continuing inflation is also making itself felt on income expectations. This indicator fell in June by over 3 points to its current value of 7.2 points. The last time the indicator was below this level was December 2006. The longer the rate of inflation in Germany remains stuck around the three percent mark, the greater the danger of an anticipated loss of purchasing power on the part of German households. Even the potentially positive effects on private income generated by the rising rate of employment may well be negated by ongoing fears concerning the rising cost of living and high energy prices.


Propensity To Buy

Falling income expectations are leading to a corresponding drop in consumer propensity to buy. After losing 16 points in May, this indicator is once more down - by over three points - and currently stands at -23.7 points, its lowest value since June 2005.

High energy prices and the threat of further drastic price rises, for example, for gas, are consolidating expectations of inflation, which, in turn, is dampening the enthusiasm of German consumers to make purchases. Consumers are assuming that they will have to pay more for energy in the future and that consequently, this money will no longer be available for other purchases.

IFO Business Climate Index June 2008

German business confidence fell to the lowest in more than two years in June, according to the reading on the Munich-based Ifo institute business climate index, based on a survey of 7,000 executives, which declined to 101.3 from 103.5 in May. That's the lowest since January 2006.






According to IFO in manufacturing the business climate worsened significantly. Firms have scaled back both their current situation assessment as well as the six-month business outlook considerably from May. Expectations fell from a revised 97.2 to 94.7. They expect weaker stimulus from export business in the coming months, but despite the strong euro, they do not fear a slump in exports. Increases in employment will be weaker, according to the survey responses.

German Flash PMIs June 2008

Flash estimates from Markit Economics suggest that the German purchasing managers index for manufacturing fell to 52.3 in June.




The German services PMI also saw a decline, falling to 53.3 from May's 53.8 level. So both German manufacturing and services are still expanding, albeit at a slwoer pace than previously.



While noting that output had diminished in both services and manufacturing, Markit Economics also highlighted the rising input and output costs due to rising oil and raw material prices.

"German private sector companies signalled that input cost inflation accelerated to a ninety-three month high during the latest survey period, underpinned by the effects of the recent spike in crude oil prices," the report said.

"Meanwhile, output prices at German private sector companies continued to rise robustly in June, with the rate of inflation the second-strongest since September 2000," it continued. "This was led by marked increases in prices charged by firms operating in the service economy."

German Producer Price Inflation May 2008

German producer-price inflation, which is widely considered to be an early indicator of price pressures in the economy, accelerated to the fastest pace in almost two years in May on energy costs. Factory gate prices increased 6 percent from a year earlier, the fastest rate since July 2006, the Federal Statistics Office in Wiesbaden said today.




Energy prices rose 15 percent from a year earlier and oil products were 25.9 percent more expensive, the statistics office said. Excluding energy, producer prices rose 2.9 percent. Oil prices have doubled in the past year and reached a record $139.89 a barrel on June 16. German inflation accelerated to 3.1 percent in May and consumer prices in Europe gained an annual 3.7 percent, the most in 16 years.

If we look at the comparative consumer and producer price indexes in the chart below, we can see that this is the second wave of increases in producer prices in recent years. The first wave which ended in mid 2006 pushed consumer prices up from a 1% to a 2% increase range. This wave has started from a higher lever and we have moved from a 2% to a 3% range. But we should note that as the rate of producer price increases dropped back after the summer of 2006 the rate of consumer price increases did not accompany it. This is what the ECB wants to avoid happening this time - consumer inflation getting "stuck" around 3%, and that is why they may well raise interest rates at the next meeting in July, despite the fact that the eurozone economies are now generally wilting under the summer heat of the high exchange rate, the credit crunch, and the high cost of energy.

German ZEW Investor Confidence June 2008

German investor confidence dropped to its lowest level in more than 15 years in June as rising inflation dimmed the growth outlook in Europe's largest economy. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations fell to minus 52.4, the lowest since December 1992, from minus 41.4 in May. A negative reading means that pessimists outnumber optimists.





European Central Bank President Jean-Claude Trichet said this month the bank may raise interest rates in July to curb the fastest euro-region inflation in 16 years. The risk is that higher borrowing costs will exacerbate the economic slowdown. Germany's benchmark DAX stock index has dropped 15 percent so far this year.



Record oil and food prices are reducing purchasing power just as a stronger euro begins to weigh on exports. Oil prices have doubled in the past year, reaching a record $139.89 a barrel yesterday. That helped drive inflation in Europe to 3.7 percent last month, and German inflation to an annual 3.1%. The ECB aims to keep the rate just below 2 percent.

``The economic upswing will clearly lose steam,'' Germany's DIHK chamber of commerce and industry said yesterday, citing a survey of more than 20,000 companies. Economic growth will more than halve to 1 percent in 2009 from 2.3 percent this year and 2.5 percent in 2007, as inflation restrains consumer spending and the euro's gains crimp demand for exports, DIHK said.

The German economy is facing a ``distinct slowdown'' next year as the stronger euro hurts exports and surging inflation damps consumer spending, government adviser Beatrice Weder di Mauro said earlier this week.

Germany's gross domestic product may expand "about 2 percent'' this year even as rising oil and food prices have driven consumer inflation to ``alarmingly high'' levels, Di Mauro, a member of Chancellor Angela Merkel's panel of economic advisers, said in an interview in Berlin.

``In any case, I would expect a distinct slowdown next year'' compared with 2008, Di Mauro said. The five-member panel has not yet given a forecast for economic growth in 2009.

Germany Inflation May 2008

Inflation accelerated in May in Germany as the cost of oil hit ever higher levels. Consumer prices, according to the European Union harmonised methodology, was up by 3.1 percent year on year, according to data from the Federal Statistics Office. That's slightly above the initial estimate of 3 percent made on May 28. Month on month prices rose 0.7 percent.



Oil prices reached a record $139.12 a barrel last week and European Central Bank President Jean-Claude Trichet indicated that the ECB may raise its benchmark rate by a quarter-point to 4.25 percent next month to contain inflation.

German inflation has now exceeded the ECB's limit of a rate "close to but below 2 percent" for over a year and even the strong appreciation in the euro has failed to offset higher oil and food costs. While the euro rose 8 percent in trade-weighted terms over the past year, oil prices doubled.



The price of fuels rose as much as 12 percent from a year earlier. Diesel jumped 26 percent and the cost of light heating oil surged 57 percent in May, the statistics office said. Food prices rose 7.9 percent compared with May 2007.

ECB policy makers have been becoming increasingly concerned that inflation expectations are on the rise. Expectations, as measured by the so-called breakeven on five-year French inflation-indexed bonds, were at 2.4 percent today, up from 2.12 percent in March.

The ECB currently predicts inflation in the euro region will average about 3.4 percent this year and slow to 2.4 percent in 2009. Economic growth is forecast to slow to 1.8 percent in 2008.

So while economic growth is cooling in EU countries, the ECB remain focused on price stability, and investors now expect the ECB to lift its repo rate twice this year, taking it to 4.5 percent, according to Eonia forward contracts.

However, according to the latest data from the German statistical office wages were rising at a slower rate than inflation in the first quarter of 2008, since employers in the industry and service sectors paid a calendar-adjusted 1.7% more for one hour worked than in the same quarter a year earlier. The two main components of labour costs showed different trends: The increase in gross wages and salaries accelerated slightly to 2.3%. However, non-wage costs declined 0.1%, which had a downward effect. This trend reflected above all the change in the rate of employers’ contributions to the unemployment insurance scheme. As of 1 January 2008, the rate was reduced from 2.10% to 1.65%.

German Exports April 2008

German exports rose more in April, led by demand from countries outside the 27-member European Union. Sales abroad, adjusted for working days and seasonal changes, gained 1.2 percent from March, when they slid 0.8 percent, the Federal Statistics Office in Wiesbaden said today. Exports rose 14 percent from a year earlier.




Shipments to countries outside the EU increased 18 percent in April from a year earlier. Exports to EU countries rose 12 percent, while imports gained 11 percent.

The German trade surplus widenend to 18.7 billion euros in April, up from 16.6 billion euros in March. The surplus in the current account, the measure of all exports including services, narrowed to 14.5 billion euros from 17.5 billion euros in the previous month.



After the rapid expansion in the first quarter, growth is likely to be "more subdued'' in the second and third quarters according to a Bundesbank statement on June 6. Basically German exports are being given a boost by exports to place like Ukraine, Russia and the Middle East. Exports to other countries withing the Eurozone have now been near stationary since last summer, dragged down I imagine by the slowdown in Italy and Spain.




Manufacturing orders in Germany unexpectedly fell for the fifth month in succession and industrial production declined for a second month, reports showed last week.

Adding to German exporters woes is the fact that the euro has gained around 18 percent against the both the dollar and sterling over the past year, while the price of oil has more than doubled in the same period, topping $139 to set a record on June 6.

German Finance Minister Peer Steinbrueck said in an interview on June 7 that surging energy costs will boost the country's inflation rate more than the government previously expected, draining the purchasing power of companies and consumers. Inflation could be ``around 3 percent,'' he said.

In April 2008, Germany dispatched commodities to the value of EUR 58.0 billion
to the Member States of the European Union, while it received commodities to the
value of EUR 46.3 billion from those countries. Compared with April 2007,
dispatches to and arrivals from the EU countries increased by 11.6% and 11.4%,
respectively. Commodities to the value of EUR 38.5 billion (+10.8%) were
dispatched to the euro area countries in April 2008, while the value of
commodities received from those countries was EUR 32.0 billion (+10.0%).
Commodities to the value of EUR 19.5 billion (+13.2%) were dispatched to EU
countries not belonging to the euro area in April 2008, while the value of the
commodities which arrived from those countries was EUR 14.4 billion (+14.8%).

Germany exported commodities to the value of EUR 31.8 billion to and
imported commodities to the value of EUR 24.7 billion from countries outside the
European Union (third countries) in April 2008. Compared with April 2007,
exports to third countries were up by 18.4% and imports from those countries by
12.1%.

German Industrial Output and Orders April 2008

Industrial production in Germany, Europe's largest economy, declined for the second consecutive month in April, the second report in as many days to suggest Europe's largest economy is cooling. Output, adjusted for seasonal swings and inflation, fell 0.8 percent from March when it fell 0.8% from February. Year on year output was up by 4.8% but the rate is still considerably down from the strongest points in the current expansion.



Production of intermediate goods dropped 2.2 percent in the month, while consumer goods and construction output declined 2.5 percent and 2.9 percent respectively, the ministry said.

Germany's economy is losing momentum as near-record oil prices push up inflation and crimp company and household spending power, just as a surging euro weighs on exports, and slowdowns in Italy and Spain also act as a drag. The outlook is also far from promising since European Central Bank President Jean-Claude Trichet said yesterday policy makers rather then loosening interest rates may even raise borrowing costs next month to curb record inflation, further damping the expansion.





Annual price gains in the euro area last month accelerated to 3.6 percent. In its quarterly forecasts, the ECB said yesterday that inflation, which it aims to keep just below 2 percent, will average about 3.4 percent this year and 2.4 percent next.

Faster inflation is starting to hurt growth. European retail sales declined 2.9 percent in April, more than three times as much as economists forecast, a report showed earlier this week. German car sales fell 6 percent last month, the VDA auto-industry trade group said June 3.


Adding to companies' woes, the euro has gained 15 percent against the dollar and 17 percent against sterling over the past year, while the price of oil has more than doubled in the same period, topping $135 to set a record on May 22.

Manufacturing orders in Germany also fell for the fifth month in succession in April , figures showed yesterday, the longest streak since 1992, as demand from the euro area slumped. Orders, adjusted for seasonal swings and inflation, fell 1.8 percent from March, according to the Economy Ministry in Berlin. This is the first time since July 1992 that manufacturing orders dropped for five consecutive months.

Foreign manufacturing orders fell 3.8 percent in the month, while domestic orders gained 0.3 percent, the ministry said yesterday. Demand from the euro-region countries slid 5.6 percent and orders from outside the currency area dropped 2.3 percent.


















Evidently not all German companies are suffering to the same measure.German plant and machinery orders rose the most in more than a year in April, driven by sales abroad, according to the VDMA machine makers association Orders increased 35 percent from a year earlier, that's the most since March 2007. Export orders increased 44 percent and domestic orders gained 19 percent from a year ago.

``Foreign orders were additionally fueled by large plant orders,'' VDMA Chief Economist Ralph Wiechers said in the statement. ``The order increase of 11 percent since the beginning of the year is a good characterization of the order situation in the machinery sector.''

In the three months through April, orders increased 12 percent from a year earlier, today's report showed. Domestic orders increased 7 percent and foreign orders rose 14percent. VDMA surveys all large German machinery makers and most small ones. Its statistics capture orders at companies that employ 15 percent of all factory workers and account for 13 percent of total manufacturing sales.

Germany Services PMI May 2008

Euro zone services activity slipped close to contraction in May, in line with expectations, as growth took a sharp hit in France, while inflationary pressures mounted, a key survey showed on Wednesday. The RBS/NTC Eurozone Services Purchasing Managers index fell to 50.6 in May, the same level as the flash estimate and as forecast by economists, from 52.0 in April.


The rate of expansion in Germany's services sector slowed in May, hit by a deterioration in business expectations and firms' worries about rising input costs.

NTC Research's business activity index for German services firms fell to 53.8 from 54.9 in April, holding above the 50 mark separating expansion from contraction for the fourth month running but weighed down by concern about the business outlook.
The figure was marginally above the flash estimate of 53.7.

"May's PMI data point to further solid growth of activity in the German service economy, notwithstanding the ongoing underperformance of the Financial Intermediation sector," said Tim Moore, economist at NTC Economics, which compiles the data. However, the overall business outlook deteriorated in May amid weaker gains in new work and the steepest fall in backlogs for five years."

The business expectations component fell to 48.0 from 51.2 in April, registering the most pessimistic reading since November 2007. This deterioration partly reflected the sharpest decline in work in hand in almost five years, NTC said.

The deterioration in the services sector growth outlook is in harmony with other recent economic indicators from Germany which have suggested that Europe's largest economy is now slowing significantly after a reasonably dynamic first quarter.

Retail sales fell sharply for a second straight month in April and unemployment rose in May for the first time in more than two years. The fall in retail sales raised questions about Germany's ability to cope with soaring fuel and food prices. High fuel and food prices sparked an acceleration in German inflation in May to 3.0 percent from 2.4 percent in April.


The services PMI prices charged component edged up to 53.5 from 53.3 in April. Another on input prices registered 61.7, slowing from 62.7 but holding well above the 50 level separating expansion from contraction.

"Average input cost inflation remained at an elevated level in May," NTC said. "Anecdotal evidence overwhelmingly suggested that sharply rising fuel prices, as well as robust wage inflation, had driven up costs at (panel members') units in May," it added.

Germany Manufacturing PMI May 2008

Germany's manufacturing sector continued to register growth in May, though export orders fell for the first time in almost five years in a sign the strong euro may well be beginning to hurt, a survey showed on Monday.


The NTC/BME Purchasing Managers index (PMI) was 53.6 in May, unchanged from April. Readings above 50 indicate growth in the sector, below that level, contraction. A preliminary "flash" estimate of the May index had yielded a reading of 53.5.




The survey, which is based on a monthly poll of about 400 companies, showed that manufacturers accelerated new hiring in May, but that growth in overall orders eased.
The PMI's sub-component index for new export orders declined to 49.2 from 51.8, indicating the first contraction in demand, and the lowest reading, since July 2003.


Euro zone manufacturing activity generally cooled further in May as factory output remained near a three-year low even while edging up slightly from the earlier flash estimate. There is also increasing evidence of a widening divergence between the big four economies in the 15-nation currency bloc with Germany and France continuing to prop-up a contracting Italy and a Spain which is in "free fall". This divergence is only going to add to the headaches over at the European Central Bank, which is already pretty worried about the continuing high inflation.



The RBS/NTC Eurozone Purchasing Managers Index for the manufacturing sector eased to 50.6 in May, down from April's 50.7 but above the earlier flash estimate of 50.5.


In a statement, NTC said a further sign that the outlook in Germany had worsened in May was that manufacturers had accumulated stocks of finished goods at the fastest pace in almost seven years.

"The decline in manufacturers' new export orders suggests a key engine of the current growth cycle ... has begun to subside amid pressure from the strong euro and weakening economic conditions in foreign markets," said NTC economist Tim Moore.

Recent economic indicators in Germany have provided a mixed message on the health of Europe's largest economy. The Ifo institute's gauge of business confidence in Germany rose for the fourth time in five months in May, but retail sales slumped for a second straight month in April.





Last month also saw the first seasonally adjusted increase in unemployment in Germany for over two years, prompting some to predict the country's labour market improvement was ending. A resurgence in inflation in May also stirred fears that rising prices would impact negatively on consumer spending, which accounts for nearly 60 percent of the economy.

NTC said the May survey data pointed to strong inflationary pressure in the manufacturing sector, with average input costs rising at their sharpest since July last year.

"A number of companies commented on higher steel and oil-related costs at their plants," NTC said. "Firms responded to the latest squeeze on their margins with a robust increase in factory gate prices, with the rate of output charge inflation only fractionally less marked than April's recent high."