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Wednesday, December 10, 2008

The ZEW Investor Sentiment Index Rebounds As Evidence Of Manufacturing Contraction Mounts

The ZEW Indicator of Economic Sentiment for Germany increased in December 2008 by 8.3 points and now stands at minus 45.2 points up from the minus 53.5 points registered in the previous month. However it is important to bear in mind that this is still well below the long term historical index average of 26.8.

The slight improvement in the ZEW economic sentiment indicator seems to suggest that worries among investors of a further deeping of the recession beyond mid 2009 are felt to be limited. It also suggests that interest rate cuts from the central banks worldwide and the economic rescue packages will lead to a renewal in economic growth in the second half of next year.

October Industrial Output Down

In the meantime the full blast of the present recession is now surely with us, and a very strong blast it is. Industrial production in Germany fell strongly in October as demand for new plant and machinery almost dried up. Output was down a seasonally adjusted 2.1 percent from September, according to the latest data from the Economy Ministry in Berlin said today. Year on year earlier, working day adjusted production fell 3.8 percent. This month’s drop was led by a 3.1 percent month on month slump in demand for investment goods.

With Worse To Come In November and December

The readings on the Ministry of Technology data fit in quite well with the results of the purchasing manager surveys (see chart below) and it is worth noting this suggested an even stronger rate of contract to come in November. Indeed German manufacturing hit a new low in November as far as the results of the PMI survey go, falling to a series-low 35.7, down on both the 36.7 flash reading and on October's 42.9 figure, according to last months data from Markit Economics.

According to the PMI report, the sharp deterioration in the composite PMI was reflected right across the components. The output component fell to a record low of 32.3 in November, from October's 41.1 level, while new orders slipped to 29.1 (so watch out for December), down 10.1 points from the previous month's 39.2. Employment also deteriorated notably, falling to 43.6, its lowest level since May 2003. The quantity of purchases and new export orders also hit new lows, coming in at 31.0 and 28.5 respectively.

Further, the price components registered notable declines. The input price category tumbled to 39.2 in November, its first sub-50 reading since September 2003 and the lowest level since October 2001. Meanwhile, the output price component fell to 48.1 from 53.3, the lowest level recorded since March 2004 and its first sub-50 figure since December 2005.

And the PMI is Confirmed By New Orders Data

I think nothing so confirms the dramatic nature of the industrial slowdown the Germans are now experiencing than the chart below which shows changes in monthly orders (both domestic and for exports) for German manufacturing industry over the last decade. As you will see (to use one of my choice phrases of late) we just went careering off a cliff.

New manufacturing orders dropped 6.1% in October from September, and in September they fell 8.3% from August. The quarter on quarter drop is huge - in the order of 40%.

Export orders are falling faster than domestic ones in the longer term during Sepetmber even domestic orders started to contract sharply as well - a 6.1% drop as compared to 6.2% for exports. What this suggests that the "second round effects" on domestic consumption from the drop in export sales are now hitting domestic manufacturing order books.

Exports Up Only 1.4% In October

According to the most recent provisional data from the Federal Statistical Office, Germany exports were worth 89.7 billion euros and imports 73.4 billion euros in October 2008. Exports were thus up 1.4% and imports up 5.4% from the respective October 2007 levels. After calendar and seasonal adjustment, exports decreased by 0.5% and imports by 3.5% month on month when compared with September 2008.

The foreign trade surplus was 16.4 billion euros in October 2008, down from last year's October surplus of 18.9 billion euros.

Growth Outlook

It is very hard to put numbers on where we are likely to go from here. Certainly GDP growth next year is going to be a shocker on the downside - with or without calendar adjustments. The Essen-based RWI economic institute forecast this week what now seems to be a "low end" prediction of a 2 percent contraction for next year, but even this would already be the biggest annual contraction since World War II. Everyone is moving on the downside and accepting the reality of what is happening, with the Berlin-based DIW economic institute also cutting its forecast for the final quarter of 2008 to a contraction of 0.3 percent - down from previously anticipated growth of 0.2 percent (citing in justification the declines in industrial output and construction).

At the other end of the scale Deutsche Bank forecast only this week that Germany’s economy will shrink in 2009 by as much as 4 percent next year. Deutsche Bank chief economist Norbert Walter makes his forecast based on the deteriorating economic situation in Russia and in the Middle East, countries which have been vital in sustaining demand for German exports in recent months.

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