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Tuesday, July 15, 2008

German Investor Confidence Drops To 16 Year Low In July

German investor confidence fell to a record low in July as surging inflation and slowing export growth started to cloud the outlook for growth in Europe's largest economy. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations dropped to minus 63.9, the lowest since the index was first compiled in December 1991, down from minus 52.4 in June.

As a stronger euro weighs on exports and the U.S. housing slump damps confidence worldwide, Germany's benchmark DAX share index has dropped 7 percent in the past month and 23 percent this year. The dollar fell to a record low against the euro again this morning, hitting $1.6038 at one point. The dollar thus extended this year's 10 percent slide following concern that confidence in the debt of Fannie Mae and Freddie Mac will deteriorate even after the U.S. government pledged support for the buyers of home loans. The stronger euro is putting pressure on German exporters already coping with a slowing global economy. The currency has gained 15 percent against the dollar over the past year, while the crisis in U.S. subprime mortgages has been sending shock waves through financial markets and reducing the outlook for global growth.

German exports declined the most in almost four years in May, as a slowdown in some key eurozone economies (Spain, Italy) and a stronger euro curbed demand. Sales abroad, adjusted for working days and seasonal changes, decreased 3.2 percent from April, the Federal Statistics Office said this morning. That was the biggest drop since June 2004.


There seems to be a general 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 the slowdown will settle. It is already clear, however, that GDP growth in 2008 will be below the heady 2.9% annual rate achieved in 2006, or the 2.5% clocked up in 2007.

The median of five forecasts published in June by the major German economic institutes sees growth in the German economy this year of 2.2%. This really now seems a highly optimistic number, especially bearing in mind the economy may in fact have shrunk in the second quarter after expanding 1.5 percent in the first three months, according to the recent statement of Deputy Economy Minister Walther Otremba.

I personally will be very surprised if we see growth at or near the 2.2% the institutes are forecasting (and much less the 2.5% put forward in the now somewhat dated EU commission April forecast, although Eurostat now have a 1.8% forecast pencilled into their database). I even consider the 1.7% from the OECD and 1.9% from Morgan Stanley to be still on the high side given the extent of downside risk and the sort of real economy data we are now seeing.

At the start of the year the German government was reckoning on a growth rate of 1.7 per cent, while Peer Steinbrück is basing himself on 1.2% for the draft budget.

“Now the president of the Bundesbank told the cabinet it might be 2 per cent, to my surprise,” Peer Steinbrück informed the Financial Times recently. “For my 2009 budget, I estimated growth at around 1.2 per cent, which accounts for all the downside risk ... Some people say it might be 1.4 or 1.5.”

Obviously I am one of the people in question, since I would go much nearer to the 1.4% rate forecast by the IMF in its April World Economic Outlook forecast, and my reasoning would be as follows. We have already had 1.5% growth in the first quarter, but we may have a negative number to put next to it in Q2. Lets make a guess: -0.2%. That brings us back to around 1.3% (its not as simple as this in practice, but bear with me for a second). So then, what if we get, say, a reasonably positive Q3: 0.4% expansion, say. But what then if we get a contraction in Q4? Then everything would depend on the rate of contraction.

Well, there's a lot of guessing going on here, and we will be a little clearer when we get the Q2 number, but the basic structure of the situation is, I think, the one I am suggesting here. Very weak (and possibly negative) growth in Q2 followed by a "bounce back" in Q3, and then a second negative quarter in Q4, a quarter which could well by that point be the first of two consecutive quarters of negative growth, that is the first part of a recession.

In addition all the indications suggest that German consumption will continue to be weak throughout 2008. So if consumer consumption is at best flat, government 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. So I would say that, based on current data, 1.4% growth in Germany in 2008 looks to be a reasonable estimate at this point, and if there is risk to this call, then I would say that it was mainly downside.

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