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Tuesday, September 30, 2008

German Employment Grows While Unemployment Falls

One of the great enigmas about the current economic slowdown in Germany is the way unemployment continues to fall and employment continues to rise, even as retails sales drop, and exports weaken. German unemployment fell again in September as machine makers hired people to work off an order backlog. The number of workers without jobs, adjusted for seasonal variations, dropped by 29,000 to 3.18 million after falling 40,000 in August, according to data from the Federal Labor Agency out today.

According to the latest comparable data of ILO equivalent measures published by the Organization of Economic Cooperation and Development, Germany's jobless rate was 7.3 percent in July. France, Germany's main trading partner, reported 7.3 percent unemployment compared with 4 percent in Japan and 5.7 percent in the U.S. The OECD average was 5.8 percent.

In a separate report the Federal Statistical Office, using a slightly different methodology (the monthly labour survey) announced that in August 2008 the number of persons in employment was 40.27 million. That was an increase by 558,000 persons (+1.4%) on August last year.

In August 2008, the number of persons in employment in Germany amounted to 40.30 million after elimination of the typical seasonal variations. That was a seasonally adjusted increase by 42,000 persons (+0.1%) on July 2008.

Based on the labour force survey, and according to the definitions of the International Labour Organization (ILO) the seasonally adjusted unemployment rate – which is harmonised across the EU and measured as the share of unemployed in the total labour force – amounted to 7.2% in Germany and was thus considerably below the level of August 2007 (8.3%).

Friday, September 26, 2008

German Consumer Confidence Rises In September, But Remains At A Very Low Level

German consumer confidence rose in September for the first time in five months after falling fuel prices left consumers with more to spend on items like food and clothing. The GfK forward looking consumer climate index for October increased to 1.8 from a revised 1.6. As can be seen in the chart, last months reading was very low, in fact it was the lowest level in five years.

The price of oil has fallen by almost a third from its record in July. Still, at more than $100 a barrel the cost remains 30 percent higher than a year ago and erodes spending power. At the same time, a deepening crisis on global financial markets may dim consumers' willingness to spend in coming months.

As for the sub components, after two months of marked losses, the economic outlook component was a little more positive in September. The indicator was up 6 points to -15.7. However, the value still remains around 56 points below that recorded in September 2007.

Income expectations were up for the second consecutive month, and the indicator was up by 2.7 points in September. It still remains at a very low level however, as documented by the value of 16.4 points below that September 2007.

The consumer propensity to buy was up quite. The indicator climbed by 15.1 points to reach -12.8 points. The propensity to consume, however, remained moderate, since it is still more than 10 points behind that recorded in the same period in the prior year.

Wednesday, September 24, 2008

German Business Confidence Falls Again In September

German business confidence declined more than expected to the lowest level since May 2005 in September as the worsening financial crisis in the U.S. damped the outlook for global economic growth. The Munich-based Ifo institute's business climate index, based on a survey of 7,000 executives, fell to 92.9 from 94.8 in August.

Tuesday, September 23, 2008

Eurozone Flash PMI's For Manufacturing And Services Indicate Continuing Contraction

Europe's manufacturing and service industries contracted in September at the fastest pace in nearly seven years as continuing problems in credit-markets slowed lending and borrowing and companies scaled back production in response to slowing orders. The Royal Bank of Scotland Group composite purchasing managers index dropped to 47 - down from 48.2 in August - and the lowest since November 2001.

While these are only initial flash estimates, and we will need to wait to see the detailed confirmation on October 1st, this extended contraction in both manufacturing and services industries does suggest that it is now touch-and-go whether the eurozone economy will contract for a second consecutive quarter in Q3 2008, making for the first collective recession since the single currency was introduced.

The manufacturing index fell to 45.3 this month, down from 47.6 in August, while the services index fell to 48.2 from 48.5.

German Manufacturing AND Services Contract

In German private sector activity contracted at its fastest pace in over five years, as both the services and the manufacturing sectors reported shrinking output.

According data from economic research group Markit Economics, the flash estimate of the composite Purchasing Managers Index for Germany fell to 48.6 in September from 50.5 in August - the lowest reading since July 2003.

Germany's manufacturing sector contracted for a second straight month, falling to 48.1 in September from 49.7 in August - the weakest performance for the sector since July 2003. Most noteworthy was the fact that the volume of new export orders was particularly weak, dropping to the lowest level for eight years. This seems to indicate that we can expect the sector to weaken further in the months to come.

According to Markit Economics economist Tim Moore "New export orders, the erstwhile bastion of strength in the manufacturing sector, declined at the steepest rate since November 2001".

The services sector PMI dropped to 49.3 from 51.4 in August, the fist contraction since January.

French Manufacturing Contracts Drastically, While Services Unexpectedly Expand

The French manufacturing PMI continued to indicate contraction in September, with the reading falling to 43.6, a much sharper rate of decline than the 45.8 registerd in August. This is the fastest pace of decline in manufacturing production since October 2001, with output being dragged down by very weak domestic demand, which prompted a huge decline in new orders, according to the statement by Markit Economics.

The service sector, on the other hand, showed unexpected strength, rising to 50.4 in September from 48.0 in August.

Friday, September 19, 2008

Germany's Exposure to Russia

I have just written an extended analysis of the recent financial turmoil in Russia. At the end of the day the article doesn't really say that much that is actually new. Obviously the Russian economy is hardly likely to experience melt down, and it is a long way from being the Baltics, but growth will probably slow considerably in the short term, and this is bound to be bad news for Germany, since the German economy is pretty dependent on Russia via one channel or another.

Basically the sudden collapse of confidence in Russian financial markets threatens to blow a hole in the business outlook for German exporters. The risk is essentially that, as the price of oil continues to fall and Russian companies struggle to tap new lines of credit, demand for German goods could start to wane, and this would be very bad news given the German economy's export dependence and given that Russia is a significant export market for Germany.

Basically exports to Russia have offered noticeable support to flagging German growth, as first the US and then Southern Europe and the UK slackened their demand for German products, so I think slowing growth in Russia (and of course China) may well mean that the German outlook deteriorates significantly.

The big risk is not just that Russia ceases to be such an important source of German export demand, but that the slowdown in Russia also impacts on other countries who are close trading partners of Russia, such as those in central and eastern Europe. This will then hit Germany indirectly, since these countries are also customers for German exports.

The popularity of high-tech, German-crafted machinery in Russia has helped its exports rise by 23 per cent in the first half of this year to €15.8bn ($22.5bn, £12.6bn), according to the latest data from the German Federal Statistics Office. To put this in perspective, this is roughly 45% of the €36.8 billion euros sent to the USA over the same period. And exports to the UK dropped 1.5% in H1 2008, while to the eurozone they were only up 3.9%. So the importance of exports to Russia has not been so much the volume of exports, as the fact that this market has represented (along with China) new export growth, and this is what the German economy needs, constantly, since domestic consumption demand remains so perenially weak.

At the same time German direct investment in Russia reached €14bn last year. About 4,600 German companies have branches in Russia, including high-profile energy projects involving Eon and Wintershall, a subsidiary of BASF, the world’s largest chemical company.

One widely quoted sign of the increasing nervousness among German businesses is the increase in government export credit guarantees for sales to the Russian market. In 2007 the German government wrote €3.2bn worth of protection for German exporters and lending institutions against the possibility of default by Russian debtors, a rise of 61 per cent compared with 2006.

Wednesday, September 17, 2008

ZEW Investor Confidence Improves Slightly In September

German investor confidence rose for the second month running in September after a decline in oil prices and a weaker euro improved expectations for greater export competitiveness. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations rose to minus 41.1 from minus 55.5 in August. This was the highest reading since April.

The price of oil has now dropped almost 40 percent from its July peak and the euro has lost 8 percent against the dollar in the past three months, providing relief to consumers and exporters. It is possible that the support from the US Treasury for FannieMae and FreddieMac may have offered the hope that the worst of the US financial sectors woes were no behind us.

Unfortunately the recent unwinding of Lehman Brothers offers a warning that such a view may be still premature. So while it is likely that the price of oil may continue to fall, the real economy effects of the most recent bout of financial turmoil and its impact on the equity markets are yet to really be felt, so all in all it would not be very suprising to see confidence drop back again in October.

Friday, September 12, 2008

German Industrial Output Falls In July

German industrial production fell quite sharply in July, for the fourth time in five months, led by a drop in demand for investment goods such as machinery. Industrial output was a seasonally adjusted 1.8 percent from June, when it rose 0.1 percent, according to data from the German Economy Ministry earlier in the week. From a year earlier, production adjusted for working days fell 0.6 percent.

The German economy, which is Europe's largest, is showing few signs of recovery after contracting in the second quarter. Factory orders fell in July, manufacturing shrank last month and business confidence declined to a three-year low. The seasonally adjusted volume index (see chart below) hit a peak in February, and has been declining virtually non-stop since.

If we look at construction (see chart below) we see a similar picture with output peaking in February, although in this case, apart from the short spike at the turn of the year, the decline is longer term, and German construction activity really hasn't recovered the momentum it obtained in the winter of 2006/07.

Output of investment goods declined 3.7 percent month on month in July, while construction production fell 2 percent. The output of consumer goods dropped 1.7 percent, with production of durable goods falling 6.5 percent. Also German factory orders fell in July, extending their longest ever streak of decline. The VDMA manufacturers association said last week that plant and machine orders dropped for a third straight month in July, led by sliding demand.

Tuesday, September 9, 2008

German Exports Fall Back In July, Imports Surge

German exports declined more than expected in July as the slowdown in Europe's other economies curbed demand for German products. Sales abroad, when adjusted for working days and seasonal factors, fell 1.7 percent from June, according to data out today from the Federal Statistics Office. Year on year, exports rose 7 percent, but imports rose 7.4% from June and were up by an annual 15.7% - remember, July was the month of record oil prices - and hence the net effect of trade on GDP in July will be significantly reduced.

German exporters are grappling with a slowdown in the economies of their main trading partners. Europe's gross domestic product shrank 0.2 percent in the second quarter and may not recover in the third, raising the risk of the first zone-wide recession since EMU was launched in 1999. Exports to the all important eurozone - which totalled 35.9 billion euros - were up 4.1% on the year. While oil prices have now fall 28 percent from the July record, they're still up almost 40 percent over the past year, although if the downward movement continues we may well see year on year negative movements in oil prices in two months or so.

As a result of the surge in imports the trade surplus narrowed to 13.9 billion euros ($20 billion) from 19.9 billion euros in June. The surplus in the current account, the measure of all exports including services, also narrowed - to 11.8 billion euros from 18.9 billion euros in June.

German factory orders continued to fall in July, extending their longest-ever declining streak and offering yet another indication that the economy may well be heading for a recession. The VDMA employers association said that plant and machine orders dropped for a third straight month in July, led by sliding foreign demand.

German business confidence declined to a three-year low last month and consumer optimism fell to the lowest level in five years.

Friday, September 5, 2008

German Services PMI August 2008

The pace of decline in eurozone service activity eased back slightly in August from July’s five-year record low. The final Markit Eurozone Services Business Activity Index came in slightly above the flash estimate of 48.2, registering 48.5 (from 48.3 in July). So eurozone services were declining more slowly, but this was, nevertheless, the third consecutive monthly fall in services activity.

Germany was the only big-four euro nation to see an expansion in the services sector in August, although even in Germany the growth rate eased back for the third time in four months and registered a seven-month low. Spain continued to record the weakest performance of the big-four, but the pace of contraction eased for the second month running from June's series record. Both France and, in particular, Italy also saw moderations in the rate of decline of their services sectors after record contractions in July.

The pace of decline of new business in Spain remained by far the steepest of the big-four euro area nations, despite moderating from record rates in recent months. The rate of contraction of new business in Italy also slowed from July's record decline while, in France, the rate was broadly unchanged from the previous two months.


Spain's services sector contracted in August as weak demand eroded new orders, activity and employment, but the rate of decline slowed slightly from July, the Purchasing Managers Index showed on Wednesday.

The Markit Research Services PMI index crept back to 39.0 from 37.1 in July, still well below the 50 divide between growth and contraction but less weak than the consensus forecast of 37.

The PMI survey, covering service companies from banks to cafes, showed activity shrinking at a rate that was only slightly slower than the record contraction in June. The worst fall was among companies providing financial and housing-related services, which have been starved of new business as Spanish house sales fall and the global credit crunch keeps lending costs high.

Confidence about business in 12 months' time turned marginally positive from a negative reading in July, but it was still the third weakest reading since the series began in 1999, and 20 percent of the companies reported staff cuts in August.


The German service sector weakened less in August than initially thought,  the service sector eased to 51.4 in August from 53.1 in July, showing growth slowing less sharply than the earlier flash estimate of 50.6. 

Hotels and restaurants also reported a difficult month as consumers, paying much more this year to cover basic food and energy costs, sought to economise. Businesses grew increasingly worried about market conditions over the next 12 months, pushing August's gauge of business expectations down to 42.8 -- the lowest reading since November 2002 -- from 43.1 in July. They became much more reluctant to recruit staff, with the jobs index at 50.4 showing new hiring offset by job shedding.


Italy's service sector shrank for the ninth month running in August, order levels continued to fall and companies faced persistent cost pressures. However, at 48.5 the Markit/ADACI purchasing managers' index beat economists' expectations given the extent of its rebound from an all-time low for the decade-old series at 45.6 in July, and companies showed some optimism that business would pick up in the medium term.

Despite the broadly gloomy picture, the business expectations sub-index rebounded from July's all-time low of 58.9 to 66.5. Although still below the long-run average of 74.2, this showed a significant upturn in optimism, particularly in the hotel and restaurant and financial services sectors.


The French PMI recovered but by less than expected, rising to 48.0 in August from 47.5 a month earlier. The previously released flash estimate had shown it rising to 48.5.

Monday, September 1, 2008

Germany's Manufacturing PMI Shows Contraction In August

Confirming the general weakness in Eurozone manufacturing activity, the Purchasing Managers' Index, or PMI for the sector stood below the neutral level for the third straight month in August. Markit Economic's manufacturing PMI for August came in at 47.6, slightly higher than the original lash estimate of 47.5. This was the third successive month in which the PMI remained below the make or break 50 level which marks the difference between an increase and a decrease in production, new orders and employment. The index was below the 50-mark all the big-four Eurozone nations.

Almost all of the national manufacturing sectors surveyed reported lower production, with Germany recording a drop in output for the first time since August 2005, thus ending a thirty-five month period of continuous expansion that has been the most sustained in the entire German survey history.

The contraction of French manufacturing sector gathered pace, with the manufacturing PMI dropping to the weakest since January 2002, the Markit/CDAF survey showed. The indicator now stands at 45.8, down from July's 47.1. The initial estimate was 45.1 for August.

The Markit/ADACI survey showed that the Italian manufacturing PMI climbed to 47.1 in August from 45.3 in July. The Italian manufacturers experienced tough operating conditions as output and new orders declined in August.

The Spanish manufacturing PMI, reported the third lowest level in the ten-year survey history. The index stood at 42.4 in August, up from 39.2 in July, the survey conducted by Markit Economics revealed.

Among others, the Manufacturing PMI for the Netherlands improved in August, although it remained below the boom-or-bust level, results of a survey by Markit Economics showed. The Dutch NEVI/DPA Purchasing Managers' index increased to 49.8 in August from 48 in July, mainly due to an increase in production levels and a slower rate of decline in new orders. Ireland's NCB Manufacturing PMI rose to 44.9 in August from July's record low.

Have German Retail Sales Now Passed Their "Peak"?

Sharp Drop In June Sales

Retail sales in Germany, Europe's largest economy, fell a second month in July as rising prices and a slowing economy acted as a brake on household spending.

Price and seasonally adjusted retail sales were down by 1.5 percent in July over June, when they fell by 1.4 percent, according to the latest data from the Federal Statistics Office. On a year on year basis there was no change over July 2007.

Now the ongoing lacklustre performance of German domestic consumption during what has been an unprecedented economic expansion in recent terms is causing a lot of heart-searching at the moment, but what many observers seem to fail to be taking note of is that German retail sales have been dropping steadily for time now, at least as measured by the seasonally adjusted constant price index.

More importantly - as will be argued in this (and other accompanying) posts - there are serious theoretical grounds (in the context of Germany's ageing population problem) for postulating that Germany's retail sales may NEVER rebound again on more than a conjunctural basis, that is we may see local "peaks" and "troughs" but the secular decline may now not reverse. This is a point which most of consensus analysts who look to a cyclically driven "rebound" in domestic consumption appear to fail to take into account.

But before going further with this point, let's take a look at some more data.

Slight Improvement In The Rate Of Contraction In The August PMI

The latest Bloomberg eurozone Purchasing Managers' Index, based on a mid-month survey of economic conditions in the euro area retail sector, pointed to a continuing contraction in retail sales across the eurozone for the third consecutive month in August. While the PMI rose to a three-month high of 47.7 it remains below the crucial 50.0 zero growth mark.

There was some, however, some variance in retail sales trends across the three largest euro area economies. Italian sales continued to fall, extending the current period of month on month consecutive declines to a year-and-a-half. However we did hit a nine month "high" with sales contracting at the slowest pace since last November, rising to 44.8 (or minus 5.2) from 38.2 (or minus 11.8). Thus August revealed a significant eeasing in the rate of contraction (a finding which is completely in harmony with the rather better consumer confidence index reading for August. Indeed the fall in Italian retail sales in August was not as strong as the one in Germany, where the rate of decline - 44.1 - accelerated to its strongest pace so far this year.

So things in Italy are bad, and they are getting worse, but they are now getting worse more slowly than they were. The fact that in August oil prices were significantly down from the July peak obviously has something to do with this situation.

The August PMI data also revealed a rather higher level of pessimism amongst retailers with regard to September sales, with the index for the sales outlook registering 48.0, down from 49.5. The data revealed some variance across countries, while French and Italian retailers expect sales to come in below target next month, which reflects underlying concerns that the economic downturn will continue, German retailers were more positive, forecasting a stronger than previously expected performance.

At the same time GfK AG's consumer sentiment reading slumped to its lowest level in five years. GfK AG's index for September, based on a survey of about 2,000 people, fell to 1.5, the lowest since June 2003, from a revised 1.9 in August, the Nuremberg-based market-research company said in a statement today.

"Peak" Retail Sales

German retail sales appear, according to the Federal Statistic Office annual index, to have "peaked" in 2006 (see chart below, where the 2008 value is my own estimate based on the first half performance, and the not unreasonable assumption that the second half - given the generally weaker economic outlook - will be no better than the first half.

Now there are complicating factors here, since there was the notorious 3% VAT hike in January 2007, which obviously did constitute quite a price shock, and will have affected the level of sale, so I may be a bit quick off the mark in calling this the ultimate "peak", but before I go into this a bit more, let's explore the background argument a little.

So the question we are faced with now, is whether or not we are faced with a "peak" retail sales phenomenon? The theoretical basis for this assumption is on reasonably solid ground, and there is evidence to show the phenomenon exists in other ageing economies (Germany, Hungary, possibly Japan). In the Italian case, I have constructed my own makeshift index, and the performance of this index since 2003 can be seen below. It seems Italian retail sales may have "peaked" in early 2003, and since that time the decline has been continuous, although sales did stabilise during 2005 and 2006 (I will come to this point later).

Germany's population is now in fact contracting. According to the Federal Statistics Office German population "peaked" in 2002, at 82,537,000, and since that point it has been declining steadily.

Germany's population is also ageing, and we know from basic life cycle theory (Modigliani) that saving and spending patterns change across the life cycle, with the propensity to borrow against future income in order to buy now declining significantly among the over 50s, and since it is increasing consumer credit that drives retail sales growth in the dyamic internal consumption economies, then it is highly likely that ageing will now act as a drag on sales growth in countries like Italy with very high median population ages (43, along with Italy and Japan). As we can see in the chart below (which comes from the US Census Bureau database), Germany's median population age has been rising steadily, and at a very rapid rate (over 1 year's increase in median population age for each calendar year, of course historically this type of rapid ageing is quite unprecedented), with the only real substantial unknowns between now and 2020 being life expectancy, which may accelerate more than anticipated (in which case the population ageing will be even more rapid), and immigration, which will slow ageing down a bit.

Peak Construction Activity?