Friday, February 29, 2008
Now for the retail sales data.
According to provisional results released by the Federal Statistical Office turnover in the German retail trade was up by 2.7% in nominal terms and 0.6% in real terms in January 2008 over January 2007. When adjusted for calendar and seasonal variations the January turnover was in 1.9% higher in nominal terms and 1.6% in real terms over December.
Now this is not an earth shattering change, but it is significant. If we add to these results the latest reading on the Bloomberg retail sales purchasing managers index, which rose to 52.1 in Feb from 44.2 in Jan (according to data released yesterday by NTC economics), then obviously we can see that the sales climate has improved somewhat. In fact this was the first time in almost a year that German retailers anticipated that future sales performance would exceed plans, while the retail sales rose for the first time in five months. The last time the retail PMI registered an expansion was in September 2007.
As I say at the start of this post, it is very hard to decide how to read all of this, but I imagine things will become clearer as the days pass. The retail PMI report also recorded an increases in France to 58.8 in February, up from January’s 56.2 while retail sales in Italy where slighly better in February at 43.8 from the 43.0 level recorded in January, but still contracting, since any reading below 50 indicates contraction.
Thursday, February 28, 2008
The jobless rate, adjusted for seasonal swings, (and as calculated using the German methodology) dropped to 8 percent from 8.1 percent in January, the Federal Labor Agency in Nuremberg said today. That's the lowest level registered since November 1992. Using the ILO compatible data - published two months behind the national data (see comparative chart below) - Germany had 3.52m jobseekers in December, and an unemployment rate of 8.2 per cent.
Employment is being supported to some extent by a mild winter that helps construction companies retain workers. At 3.6 degrees Celsius the average temperature in February was 3.3 degrees higher than the long-term average, said Andreas Friedrich, meteorologist at the Offenbach-based weather service DWD.
However despite the drop in umeployment domestic consumption has been falling:
For a detailed explanation of why this improvement in employment may not be passing through to an improvement in consumption see this post here. The Financial Times point out in this article that employment growth seems to be conyinuing apace in small to middle size companies, but there is some concern that larger firms may be shedding labour. The engineering group Siemens and tyremaker Continental have both recently announced staffing reductions and BMW and consumer products group Henkel added themselves to the list this week announcing that 8,100 and 3,000 jobs were to go respectively.
In the past, such large cuts have mainly affected workers outside Germany owing to the legal difficulties and high costs associated with implementing redundancy plans at home. However, since a package of reforms introduced in 2004 increased the flexibility of Germany’s labour market, economists say such big cuts could now have a swifter impact on the labour statistics.
Some evidence to support this view can be found in the fact that the number of workers in jobs liable to social security contributions dropped back again in November and December (the last months for which we have data at this point), although if we look at the chart we can see that some of this may well be seasonal, since a similar tendency can be seen last winter.
However, the federal labour agency stressd that both the mild weather this winter and the changes in the laws governing seasonal unemployment, which mainly affected construction workers, might be influencing the figures, since these factors will not yet been adequately incorporated in the seasonal correction formula. So we need to wait a couple more months yet awhile before we can really see what is happening here. Interestingly enough Frank-Jürgen Weise, head of the labour agency, pointed to three factors as possibly influencing the data at this point: strong economic growth, the impact of past labour market reforms, and a shrinking active population as the German workforce ages. This last component in particular is far too often neglected by employment commentators. Again we are still at an early stage in this process, but some indication of recent movements can be gained from the chart below.
Wednesday, February 27, 2008
And since the constant reading is the by-product of a number of significant shifts in the sub-components, it is perhaps worth looking at these in detail. Firstly economic expectations:
The slight improvement in economic expectations apparent in January has not been sustained for long. After rising by a good 5 points at the start of the year, the indicator dropped considerably in February and fell 14.1 points to stand at 14.6. A decline of this order of magnitude has not been since the end of 2006.
The evolution in this index does not look at all positive, to say the least. Then we have the propensity to buy.
After two consecutive rises in a row, consumer propensity to buy in Germany dropped back significantly in February and the indicator fell from minus 8.8 points in January to minus 15 points.
This index is now well bogged down in negative territory, which is entirely consistent with the contraction in domestic consumption seen in Q4 2007. Finally income expectations.
After a slight dip in January, income expectations rose again this month, with the indicator climbing 4.2 points to its current level of minus 0.5 points. After two slight falls in a row, consumers’ expectations regarding their own financial situation are therefore once again at the level recorded in November 2007.
As we can see, this has stabilised and even improved very slightly in the last couple of months. Unfortunately, this is likely to be the most carefully watched indicator over at the ECB, and this sudden revival in income expectations is just what they don't want to see. Basically the distribution of the sub components would seem to be the worst of all combinations from the point of view of macro economic policy making, although not - it is worth noting - from the perspective of euro/dollar market participants, and it is not surprising that the combination of yesterday's news about the IFO reading and this GFK one has finally sent the euro through the 1:50 barrier.
The Munich-based Ifo institute said yesterday that its business climate index, based on a survey of 7,000 executives, increased to 104.1 from 103.4 in January. But as we can see in the chart below this rise was only a very moderate improvement, and the change was largely in the current conditions component, without much significant change in the longer term outlook.
The dollar in fact went up as far as $1.5047 per euro, the lowest since the European single currency was introduced in 1999, before trading at $1.5017 as of 6:47 a.m. in London from $1.4974 in late New York yesterday. The euro reached a six-week high against the yen as traders continued to bet the ECB will keep its 4 percent rate unchanged in coming months, with euro falling back to 160.56 yen after reaching 161.39.
Obviously what now gets to happen next would seem to be anyone's guess, since we are well past the point were previous experience could be considered a sure guide. Clearly one possibility is that this euro "rally" will rune out of steam (but would we be right at this point in treating this simply as a rally, may it not be more a structural by-product of something or other, see below). For one thing, for the euro to receive a substantial downward correction one has to assume that the US treasury would simply sit back and let it happen. But the US is itself in the midst of its own hard fought "dollar correction" which is seen as being essential to correct the current account imbalance, so at the present point the US Treasury are far from being unhappy with the current state of Euro-USD, and they could resist anything which smelt of a sharp upward correction in the dollar, maybe even by selling dollars.
I am sure they would accept a moderate downward adjustment, say - guessing for illustration purposes - to 1.40. But I am not sure they are ready willing and able for a major upward hike in the dollar. Nor are very many people in the financial markets anticipating this outcome, even though the macro economic data we are seeing would be much more in harmony with such a view.
Again, neither the Japanese and nor the Chinese would be especially happy about the advent of a "cheaper euro" since they have been tending to regard the European markets as a convenient fall-back position in the face of a weakened export market in the United States (and it might be interesting for someone or other to explore what the Russians and the Gulf-peggars would be looking for at this stage). Basically there are some pretty hefty players at the central bank level out there pushing their own interests, and many of these will not coincide with the forward looking macro concerns at the ECB, so we need to try think about and monitor how they respond at each given stage.
Basically, as I have been arguing, there are two opposite tendencies at work here. A short term one for the dollar to fall vis a vis the euro, and a longer run one whereby both of them have fall against an as yet unspecified basket of currencies. The basket may be unspecified, but my guess is that the rupee and the real will be in it. Possibly the Turkish lira. In fact how all this might pan out is that those who are left in the basket of emerging market currencies tracked by Bloomberg after the coming correction is over (ie, for example, after Eastern Europe has been forcefully stripped out) might well go to form the emerging nucleus here. So market realities rather than G7 policy may well be the final determinant here, which I suppose, given the zeitgeist of the times, would only be appropriate.
What I am trying to work out as all this moves forward is what weighting (in that mental topological map we all carry round in our heads I mean) to give to each of the processes - the short one and the long term on I mean. Up to the end of last year I was always expecting a euro crash against the dollar (since the underlying longer term macro seemed to suggest this), but then so many things have happened that neither I nor anyone else was expecting (I WASN'T expecting so many immigrants to arrive in Spain over the last 5 years, for example, and I wasn't expecting the Japanese housewives loss of home bias, nor the way in which local central banks could lose control of monetary policy etc etc) that I think the only thing to beware of at the moment are the "we've seen all this before" type of arguments".
So now I am not so sure at all what gets to happen next, and I am would be simply arguing for keeping a semi-open mind, and following closely what actually happens as it happens. This is also the case since there is no easy and obvious solution that suits everyone here, and that is always a problematic factor.
Meanwhile, the German economy is visibly slowing. The detailed GDP data were out earlier in the week, and quarter on quarter growth is slowing steadily and inexorably.
The rate of increase in monthly exports is also falling raidly (to zero in December)
while houshold consumption has suffered a complete slump since the heady days of the pre VAT hike in Q4 2006.
And it is not simply the German economy that is slowing, none of the "big four" could be argued to be in perfect shape. Italy may already be in recession. ISTAT haven't even had the stomach to release the Q4 2007 numbers yet, although everyone who will have seen the provisional version of them has been busily revising down the 2008 outlook considerably.
Almost all the macro data we have seen coming out of Spain over the last three months (retail sales, industrial output, services activity, consumer confidence) has been unequivocally bad. Strangely the only vaguely positive reading was Q4 2007 preliminary GDP data, and we are still waiting for details to try and understand why this should be the case. Spain seems to have had a bank loan sudden dead stop in December, and according to the latest Eurostat release construction activity is now falling heavily (down 9.5% year on year in December). So we now seem to face the very preoccupying possibility of a credit crunch and systemic banking crisis feeding into a naturally slowing real economy.
The only vaguely positive outlook among the big four would seem to be in France, where performance is holding up rather better than the rest, but how long this will prove to be sustainable if the rest continue to head south is a very moot point indeed.
Germany continues to constitute the major puzzle for many observers. Job growth continues, but at the same time consumption slides. Evidently with so many older workers being sucked into employment the bang per buck in jobs for consumption terms seems low, and many of the jobs being created may have a very low real economic content. On the other hand, despite some slowdown of late Germany is apparently exporting and investing like hell, but what the question we need to ask ourselves is just how vulnerable that may be to any problems which boil over in Eastern Europe.
Basically German export growth is highly interlocked with growth in the EU10, and to a lesser degree Russia, Ukraine, Serbia, Croatia etc. Some of these economies are still accelerating very rapidly - Poland, Slovakia, the Czech Republic, Romania Ukraine, Russia etc - and obviously Germany is getting a lot of very positive spin off from this. But much of this frenetic growth this isn't going to last very long. The strong uptick in inflation across the whole region suggests that one economy after another is now overheating, and some who have already blown out after the over-heat are now steadily "cooling" - Latvia, Lithuania, Estonia, Hungary, possibly Bulgaria. So how far are we away from all this overheating producing a sudden bout of "cooling" in a wider group of East European economies. Months at the most I would say. And if this view is right, and Germany can no longer continue to boost sales in Eastern Europe to get growth, what does that tell us about the ability of its export dependent economy to stand the pressure of a very high euro-dollar as we move forward? This I think is the key question we should all be asking ourselves at this point.
Tuesday, February 26, 2008
Ifo's measure of current conditions rose to 110.3 from 107.9, with a gauge of sentiment in the retail sector rising the most ever, to 1.3 from minus 17.5 last month. Still, a gauge of overall business expectations dropped more than economists forecast, to 98.2 from 99.
Ifo on Feb. 21 cut its 2008 growth forecast for the German economy to 1.6 percent from 1.8 percent. German household spending contracted 0.8 percent in the fourth quarter from the third, slowing economic growth to 0.3 percent from 0.7 percent, the Federal Statistics Office said today.
We now have the detailed results from the federal statistics office, and we find that economic growth in the fourth quarter was laregy supported by foreign trade and gross fixed capital formation (in particular in machinery and equipment).
An increase of seasonally and calendar adjusted exports by 1.3% and a slight decline of imports (–0.2%) resulted in steady growth in net exports, which contributed 0.7% to GDP growth. We should note however that the rate of increase in export growth is now slowing, and that if the trend seen in the chart below continues, then the German economy - which is essentially export dependent - will soon be in recession.
Domestic growth was based on continuing increases in gross fixed capital formation in machinery and equipment (and not in construction), which was up 3.4% on the preceding quarter. This investment in machinery and equipment is itself to some extent driven by the needs of the export industry. As can be seen in the following chart, this has really held up remarkably well, and it is the sustained pace of this investment which has really prevented the German economy slowing more at this point, although we will now need to watch carefully how this evolves in the coming months.
In contrast, capital formation in construction was down on the third quarter (–1.1%). The German construction industry has not been a driver of the Germany economy for many years now, and it is this weak construction share which in many ways explains why Germany is so exports dependent. The general line of the construction share is down - reduced by both constraints on public spending, as the non-discretionary ageing populated share continues to climb, and lower demand for new housing produced by Germany's comparatively lower rate of new household formation.
Overall final domestic consumption expenditure was an impediment to growth. In particular, final consumption expenditure by private households fell markedly (–0.8%) and to this weak private consumption was added a reduction in government final consumption expenditure, which had been increasing slightly during the first three quarters, but which also was down 0.5% in the fourth quarter when compared with the third.
As can be seen in the chart above, German private consumption has not prove able at this point to recover from the pre VAT increase surge in Q4 2006. Will the decison to raise taxes to try to "painlessly" address ageing population related fiscal problems finally turn out to have been one of the worst errors of economic judgement in recent European policy making?
Wednesday, February 20, 2008
Evidence that companies are passing on higher costs has raised concern among ECB policy makers of an inflation spiral, such as demands for higher pay to compensate for rising prices. ``The pricing power of firms, notably in market segments with low competition, could be stronger than expected,'' ECB President Jean-Claude Trichet said Feb. 7.
So basically the most important impact of this rise in producer prices is likely to be on the policy making process at the ECB.
The price of oil has surged 71 percent in the last 12 months, reaching a record $100.10 a barrel yesterday in trading on the New York Mercantile Exchange and pushing German inflation to 3 percent last month.
Oil products gained 18.7 percent from a year earlier, the cost of gasoline was up 11.8 percent, today's report showed, heavy heating oil surged 47 percent. Producer prices excluding energy rose 2.5 percent in January 2008 from January 2007.
German consumer confidence held near a two-year low in February as inflation reduced households' spending power.
Thursday, February 14, 2008
GDP was up 1.6% in the fourth quarter of 2007 when compared with the same quarter a year earlier. On a calendar-adjusted basis, the growth rate was 1.8%, since in the fourth quarter of 2007 there was one working day less than a year earlier.
The previously released provisional growth rate of 2.5% (calendar adjusted +2.6%) for German GDP in whole year 2007 remains unchanged.
Economic growth in the fourth quarter was driven by capital investment in machinery and equipment, and on net exports (ie the trade balance), which were partly sustained by the slowdown in imports. A negative contribution was made by domestic consumption, which was characterised by decreasing household final consumption expenditure.
Employment growth remained strong in the fourth quarter, with 40.3 million persons in employment, an increase of 617,000 persons or 1.6% on Q4 2006.
What is evident from all of this is that Germany's expansion is losing momentum as a surge in the euro against the dollar makes exports less competitive abroad just as the U.S. economy hovers near recession and households grapple with faster inflation. The government last month cut its 2008 growth forecast, citing the euro and oil costs., and it now expects the economy to expand 1.7 percent this year, following the 2.5 percent achieved in 2007.
Tuesday, February 12, 2008
This being said, the rebound was only very slight, and since the situation in Germany is far from disastrous at the present time, it is hard to see why analysts expected the reading to continue going down when it was already at a 15 year low.
Again, whether or not exports will hold up in the coming months is still a very much open question, since year on year rates of increase have been - as reported in this post - almost in "freefall" recently, and once annual increases in exports fall to zero then its normally recession time in Germany's export dependent economy.
Friday, February 8, 2008
Sales abroad, adjusted for working days and seasonal changes, fell 1.2 percent from November, when they declined 0.5 percent, the Federal Statistics Office in Wiesbaden said today. Equally importantly, the year on year growth in exports fell to zero in December (when compared with December 2006). Today's report suggests that the surge in the euro, which makes exports less competitive abroad, is hitting manufacturers in Germany just as the U.S. economy hovers on the point of recesession.
In the year, exports were unchanged and imports rose 0.1 percent, today's report showed. Imports rose 5.3 percent from November. The trade surplus narrowed to 10.8 billion euros ($15.6 billion) from 19.5 billion euros. In 2007, the surplus was 198.8billion euros, up from 159 billion euros in the previous year.
A number of indicators on the export front are giving a clear warning of the problem which is arriving. The first of these would be the year on year chart for the rate of export growth. How anyone can look at the slope of this line and say that recent events in Europe and globally have had no effect on the German economy I simply don't know.
Now it is important at this point to get hold of the idea that Germany is a high median population age society, and cannot fall back on domestic demand in times of trouble, since this is now as congenitally weak as I am congenitally hard of hearing.
Basically German GDP growth no tracks exports growth - or perhaps better put - export surplus growth, as the above chart indicates. If we look what happened to GDP growth after export growth collapsed in 2000, we can perhaps get the best idea of what is about to happen next in Germany. I think the part of the picture many people simply aren't getting at present is the implication of being export dependent.
Thursday, February 7, 2008
According to data relased by the Economy Ministry in Berlin earlier today, output increased by a seasonally adjusted 0.8 percentin December from November, when it declined a revised 0.3 percent.
Today's report suggests some parts of German industry are weathering the euro's 11 percent gain against the dollar over the past year rather better than might have been expected, although today's exports numbers put a question mark over the strength of this process going forward.Overall, production of consumer goods rose 2.3 percent in December from November, the ministry said, with durable goods up 3.5 percent and output of non-durable goods increasing 2.1 percent. Investment goods production dropped 2 percent.
German plant and machinery orders rose 14 percent in December from a year earlier, fueled by sales abroad, the VDMA machine makers association said Jan. 6.
Other reports hawever have been showing a more mixed picture. The January services purchasing managers index incicated contraction, and retail sales fell sharply. Construction activity, which improved very slightly in December is still operating at very low levels.
German exports fell for a second month in December, and manufacturing orders dropped the most in five months, led by a drop in export sales, the ministry said yesterday, giving us another sign that Europe's largest economy is losing momentum.
Orders, adjusted for seasonal swings and inflation, fell 1.7 percent from November, when they rose 3 percent. This report, when combined with the November and December trade data suggests manufacturers are starting to feel the pinch of a surge in the euro that's making their exports less competitive abroad just as the U.S. economy hovers near recession. Chancellor Angela Merkel's government cut its 2008 growth forecast last month, citing a stronger euro and the increase in oil prices.
Tuesday, February 5, 2008
The slowdown presents a real headache for the view of European Central Bank that the euro region is strong enough to cope with a cooling U.S. economy and that inflation concerns prevents them from following the Federal Reserve into monetary easing. In the U.S., which is the second biggest destination for euro-area exports, the Fed eased monetary policy by the most since 1990 last month, to bolster the economy.
The euro fell as much as 1.1 percent to $1.4671 and traded at $1.4683 at 11:32 in Frankfurt. The Dow Jones 600 Stoxx index extended declines after today's figures, falling as low as 326.33 from 329.13 yesterday.
The national indexes fell across the board with Germany's service industry slumping below the 50 threshold for the first time in 4 1/2 years and Spain's service sector shrinking the most since the survey began in 1999. A composite measure for the euro region fell to 51.8 from 52.7 the previous month, according to the report, which is based on a survey of purchasing managers by NTC Economics.
The purchasing managers index for Germany's services sector fell to 49.2 in January, indicating that the sector has entered a period of contraction, market sources said Tuesday. That compares with a reading of 51.2 in December.
The Italian services index fell to a seasonally adjusted 47.9 in January from 49.7 in December, reaching the lowest level since May 2005.
The International Monetary Fund last week cut its euro-region growth estimate by half a point to 1.6 percent, saying the turmoil in financial markets has spread to the rest of the economy. The IMF now expects the global economy to expand 4.1 percent this year, below the 4.4 percent pace projected in October.
Friday, February 1, 2008
European retail sales fell for a fourth month in January as rising fuel, utility and food prices left shoppers with less money to spend, the Bloomberg purchasing managers index showed. The gauge of sales in the euro region was a seasonally adjusted 48.1, compared with 46 in December. A reading below 50 indicates a decline. The index is based on a survey of more than 1,000 executives compiled for Bloomberg News by NTC Economics Ltd.
In Germany, Europe's largest economy, the index also showed a decline, registering 44.2 after giving a reading of 44 in December.
Italian sales dropped to 43 from 44.7, the biggest monthly decline since the survey began four years ago.In France, on the other hand, the index rose to 56.2 from 49.1. What this actually means in practice remains to be seen. Italy already seems to be in recesion at a good first aproximation guess, and Germany appears to be on the threshold. What is not clear is where exactly France is in the process at this part of time. On the surface she appears to be showing more resilience, but the proof of the pudding will most definitely be in the eating thereof.