Friday, March 28, 2008
German retailers, meanwhile, saw what appears to be a modest rise in sales for the second successive month, but the rate of increase was down slightly on the six-month high seen in February and weaker than that posted in France (the index fell from 52.1 to 51.5). Strong growth of sales in the food& drink sector sustained the overall index above 50.0.
The high year-on-year rate of price increase is influenced by price rises for food and non-alcoholic beverages as well as for mineral oil products. Prices of food and non-alcoholic beverages in the six Länder in March 2008 were up by 0.2% to 0.9% compared with the previous month and were thus above March 2007 levels by between 7.3% and 9.6%. Prices of liquid fuel were by between 5.1% and 8.9% above February 2008 levels and by between 35.8% and 44.3% above March 2007 levels. Motor fuel prices rose by between 3.6% and 5.3% on February 2008 and by between 11.6% and 14.4% on March 2007.
A stable month-on-month price trend was observed for electricity and gas (between –0.2% and +0.1%). Seasonal increases were recorded in March 2008 for package holiday prices (+0.8%) compared with February 2008. They were thus by 4.8% higher than a year earlier. That price increase is also due to the early Easter in 2008. In 2007, Easter holidays were in April.
Thursday, March 27, 2008
Consumer climate: stable developments with slight upward trend
The positive development of the indicators this month has resulted in a slight upward trend for the consumer climate. The overall indicator forecasts 4.6 points for April, which represents a minor improvement. The current greater tendency towards savings prevented a more substantial increase in the indicator. In the first three months of this year, the indicator has hovered at 4.5 points.
It would certainly be too soon to speak of a trend reversal. High rates of inflation and new record values for the US dollar and the price of crude oil are likely to stop consumers from immediately giving up their restraint in terms of consumption. For a trend reversal to materialize, prices will need to settle down in particular. This would put the focus back on positive conditions, such as the good situation in the labor market.
In view of current price trends and the continued high rates of inflation, the previous consumption forecast of 1.5% in real terms does not seem attainable. GfK is therefore revising consumption expectations for 2008 to 1%.
Economic expectations: restrained optimism
After the setback last month which amounted to a decrease of more than 14 points, the economic expectations of German consumers stabilized again in March. The indicator rose marginally by 0.4 points and now stands at 15.0 points.
A degree of uncertainty persists among German citizens with regard to economic developments. The effects of the US mortgage crisis, which have resulted in significant capital losses and the associated credit squeeze for major banks, have somewhat dampened optimism regarding the economy. The weak US dollar and the growing number of signs pointing towards recession in the USA are also depressing consumer sentiment. As consumers are currently unable to assess the extent to which these negative developments will ultimately affect the German economy, they have remained cautious.
Income expectations: collective wage agreements provide hope
Following the marked gains of more than 4 points in the prior month, the indicator for income expectations continued to climb in March. With an increase of 2 points, the rise remains lower than in the prior month. The indicator currently stands at 1.5 points and has returned to the positive range for the first time since September 2007.
The latest collective wage agreements in the metal industry and for train drivers, which were favorable from the point of view of consumers, have achieved the intended effect. It appears that hopes of also achieving a good outcome in the imminent negotiations are outweighing inflation-related concerns. Respondents are slightly more confident that wages and salaries will rise above the rate of inflation, making an increase in income possible in real terms.
Propensity to buy: signs of a slow recovery
The propensity to buy indicator has gone up again in March. However, the increase of almost 5 points means that the losses of the prior month can only partly be compensated. At currently -10.2 points, the propensity to buy in March is a good 2 points above the corresponding figure for the prior year. However, the propensity to buy indicator remains considerably below the long-term average of 0 points.
Despite ongoing fears of inflation, consumers appear more prepared to make major purchases. Nevertheless, some uncertainty remains in the wake of rising energy and food prices.
Wednesday, March 26, 2008
Ifo's gauge of expectations rose to 98.4 from 98.2, while the index of sentiment on current conditions advanced to 111.5 from 110.3.
Exports jumped 3.8 percent in January, unemployment fell to a 15-year low of 8 percent in February. German companies are benefiting from booming demand for their goods in emerging economies in Eastern Europe and the recent surge in demand in Russia. However the rate of export growth is predicted to slow to 5 percent this year from 8.5 percent in 2007 according to the BGA exporters' lobby in a press release on March 12, and even this slowdown would be noted, since it is export growth which is holding up the whole deifice at this point, and then, should the problems which are now emerging in the East European economies turn out to be more severe than anticipated, well then Germany would be very exposed. But for now, sufficient unto the day is the good news thereof, modest as it may be.
Sunday, March 16, 2008
According to the latest data release, in the fourth quarter of 2007 employers in the industry and service sectors paid a calendar-adjusted 1.1% more per hour worked than in the same quarter a year earlier. It is important to notice here that the two main components of labour costs showed slightly different trends. While the costs of gross wages and salaries were up 1.5%, non-wage costs were down 0.4%. Compared with the previous quarter, the costs of one hour worked increased a seasonally and calendar-adjusted 0.4%.
In 2007, labour costs in the industry and in service sectors increased a calendar-adjusted 0.9% over the previous year. The index of gross wages and salaries was up by 1.3%. By contrast, the index of non-wage costs decreased 0.5%. The decrease is due to the reduction in employers’ contribution rates for unemployment insurance (from 3.25% in 2006 to 2.1% from 2007) a decrease which more than offset the increase in employers’ contribution rates for statutory health insurance (up from 6.6% to 7.0%) and for pension insurance (up from 9.75% to 9.95%) in 2007. The basic philosophy behind this restructuring was a to make some sort of trade-off between a VAT rise and a reduction in the contributions wedge on wages in an attempt to create employment (which obviously has to some extent worked on the employment side, although it clearly has not worked on the household consumption and CPI side).
What all this means in practice is that the German total wage cost increase data for 2007 is somewhat lower than the actually underlying wages only trend, and this will be noticed in Q1 2008 as the base effect drops out. But still, if the trend is 1.3% rather than 0.9%, this hardly constitutes a wages explosion. The question is why it should be that growth is being sustained, unemployment is falling, and yet real wages are alos falling. I think I offer some part of the explanation in this post here, and the fact that a very similar state of affairs now exists in Japan would seem to reinforce my argument (and this post here).
Also the latest quarterly data from Eurostat - which uses a slightly different methodology - shows that among the EU Member States for which data were available for the fourth quarter of 2007 the smallest annual increases in hourly labour costs were observed in Luxembourg (1.0%) and Germany (1.5%), ie that Germany had the second lowest, and a far far cry from the other end of the scale, since the highest annual rises were registered in Latvia (30.1%), Romania (21.6%), Estonia (20.7%) and Lithuania (20.5%).
Germans are feeling the pinch. Although the country's economy has been growing steadily in recent years, the man in the street is, in fact, worse off, as average incomes have failed to keep up with inflation. In fact real wages - which I have derived by simply subtracting the CPI rate from the wages data - have been negative since at least the start of 2006, ie through virtually the whole of the current expansion.
This picture is also confirmed by new figures released by the Finance Ministry last week, which showed that over the last three years prices have been rising faster than disposables incomes - and that the drop in real wages has been accelerating.
The figures, which were released by the government in response to an inquiry from the opposition Free Democratic Party (FDP), show the average worker is getting worse off at an increasing rate. Published in last Friday's Süddeutsche Zeitung, the numbers basically show that an average family with two children was 0.4 percent richer in 2004 compared to the previous year. However, in 2005 and 2006 average disposable incomes fell by 1.1 percent. Last year, the fall increased to 1.3 percent. Workers without families suffered similar falls in income.
Of course, the idea that their purchasing power is declining won't come as any great surprise to most Germans. Relative to one year ago, prices for a number of goods and services have risen drastically. Petrol prices have shot up by 10 percent with diesel rising by 16 percent relative to Feb. 2007. Electricity is likewise 7 percent more expensive and natural gas prices are set to rise in April. Even a bag of groceries costs on average 7.8 percent more than a year ago according to the Federal Statistics Office who said last Friday that the inflation rate hit - as measured by the EU harmonised index was up by 2.9% percent in February.
The bad news comes on the heels of a report by the German Institute for Economic Research that Germany's middle class is continuing to shrink. Whereas the group made up a solid 62 percent of German society for decades, only 54 percent are now considered to be middle class.
This confidence reading has been followed by at worst a flattening out and at best a slight uptick in a whole slew of German indicators like the IFO and Zew indexes, the GFK consumer confidence index, the February manufacturing and services purchasing managers indexes, and the performance in retail sales. All these point more or less in the same direction. So what is causing this rather unexpected resurgence in life?
Exports Lead the Way
Well since the German economy is basically export and not domestic-consumption lead, perhaps our instincts should tell us that export performance would be the best place to look to try and get a handle on what has been happening, and it seems that if we follow our instincts and do just this, then we will find that at least on this occassion our intuitions have not failed us, since according to the lates provisional data from the Federal Statistical Office, a decisive improvement can be noted in January's export performance over the December 2007 one, and indeed January marks the first month of improvement after several months of weakening on the export front.
In fact in January 2008 Germany exported goods to the value of EUR 84.4 billion while imported goods to a value of EUR 67.3 billion (thus having a trade surplus of EUR 17.1 billion). What this means is that German exports were up 9% year on year (and imports up 10.2%) when compared with January 2007. When allowing for calendar and seasonal factors, German exports increased by 3.8% and imports by 4.2% over December 2007.
As we can see fromn the above chart, German exports staged a definite recovery in January, and this recovery is thoroughly consistent with data readings we have been getting on other (previously mentioned) fronts, like the IFO and ZEW indexes, and the manufacturing and services PMIs. Curiously this situation is also consistent with results we have been seeing for exports in Japan (and for more comparisons between what is happening in Germany and what is happening in Japan see my Q4 2007 GDP revisions post, and Claus Vistesen's Is Japan Resisting one).
It is important to stress that this development does not by any means constitute a 100% U turn for the German economy, but it does mean that a pretty effective short term brake has been applied to the downward movement in economic activity, and it now remains to be seen how this deceleration/acceleration struggle pans out over the next two to three months. The broad brushstroke conclusion we might draw is that this rebound is unlikely to be a permanent one, but for the time being it is cushioning the German economy to some considerable extent.
A large share of German growth is driven by exports, and in particular by the foreign trade balance which showed a surplus of EUR 17.1 billion in January 2008 up from the EUR 16.4 billion achieved in January 2007.
It is also important to be aware that to get GDP growth Germany needs not only to maintain the balance, but increase it and to keep increasing it, since the correlate between GDP growth and export growth is a pretty strong one. But it is just in Germany (and Japan's) anility to keep increasing the size of the surplus as we move forward that their whole growth dynamic may falter.
In January 2008 Germany exported EUR 54.3 billion of goods to EU Member States, while it received EUR 43.1 billion worth of imports from EU countries. Compared with January 2007, dispatches to and arrivals from the EU countries increased by 7.7% and 11.2%, respectively. Goods to the value of EUR 36.2 billion (+6.3%) went to euro area countries in January 2008, while imports from those countries were EUR 29.9 billion (+10.0%).
Goods to the value of EUR 18.1 billion (+10.5%) went to EU countries not belonging to the euro area in January 2008, while goods arriving from those countries had a value of EUR 13.2 billion (+13.9%).
Germany exported goods to the value of EUR 30.0 billion to and imported goods to the value of EUR 24.2 billion from countries outside the European Union (third countries) in January 2008. Compared with January 2007, exports to third countries were up by 11.5% and imports from those countries by 8.5%.
In 2007 Germany imported goods to a value of 772,511 million euros as compared with 733,994 million euros in 2006, an increase of 5.2%. In 2007 Germany exported goods to a value of 969,049 million euros as compared with 893,042 million euros in 2006, an increase of 8.5%. In 2007 the goods trade surplus was 196,538 million euros as compared with 159,048 million euros in 2006. This means there was an increase of 23.6% in the trade surplus between 2006 and 2007, and it is the trade surplus that to a large extent drives German GDP growth.
It's Where The Exports Are Going That Matters, Silly!
In 2007 about three quarters of German exports went to European countries, and 65% wentto the member states of the European Union. The second sales market after Europe was Asia with a share of about 11%, followed closely followed by America, with a share of approximately 10%. So Europe is the key to German growth, this is both evident and a very clear indication of why German exports have been so resilient to the rising value of the euro. To put things in perspective in 2007, and despite all the talk about the "China factor" Germany in fact exported effectively the same quantity of products to the Czech Republic ( 26,026.6 million euro) - population circa 10 million, as it did to China (29,922.7) - population circa 1.3 billion. meantime the quantity of products exported to the United States actually fell between 2006 and 2007.
Below you will find lists of German exports by countries for 2006 and 2007 for the leading destinations. A quick look through the two lists is revealing. Of particular interest are, for example, the fact that the numbers for China only increased by 8.7% on the year (up from 27,520.6 million euro in 2006 to 29,922.7 million euro in 2007, a difference of 2,402.1million euro) while exports to the Czech Republic (up from 22,255.3 million euro in 2006 to 26,026.6 million euro in 2007 or an incease of 3,771.3 million Euro) were rising at almost double the Chinese rate (up by 16.9%). The importance of United States as an export destination, on the other hand, declined, since exports there were down from 78,011.4 million euro in 2006 to 73,356.0 million euro in 2007, a decrease of 4,655.4 million Euro or 6%. Poland, which is another important destination for German exports was up from 28,820,4 million euro in 2006 to 36,083.2 million euro in 2007. An increase of 7,262.8 million Euro or 25.2%. Spain was also up considerably (as was Italy), rising from 42,159.2 million euro in 2006 to 48,157.7 million euro in 2007, that is an increase of 5,998.5 million Euro or 14.2%. The Russian Fderation is up from 23,371.8 million euro in 2006 to 28,185.2 million euro in 2007, that is an increase of 4,813.4 million Euro or 20.6%.
Now the list I have just gone through is scarecly a randomly chosen one. The decline in importance of the United States as an export destination for both Germany and Japan - which are the world'd No 3 and No2 economies respectively, and are both export driven - surely has some implications for the whole decoupling-recoupling debate. Also, the dependence of the German economy for exports growth on Poland, Czech Republic, Russia, Italy and Spain - all of which may have economic issues in 2008 of greater or lesser importance - is surely more than a minor detail, and the evolution of the east european and latin economies needs to be closely monitored for what they can tell us about the future path of the German one.
Whole Year 2007 German Exports by Country in Million Euro
United States 73,356.0
United Kingdom 70,998.8
China, People's Republic of 29,922.7
Russian Federation 28,185.2
Czech Republik 26,026.6
Korea, Republic of 8,733.0
Whole Year 2006 German Exports by Country in Million Euro
United States 78,011.4
United Kingdom 65,340.5
China, People's Republic of 27,520.6
Russian Federation 23,371.8
Czech Republik 22,255.3
Korea, Republic of 8,476.2
So what I want to say in this post is that it is now quite evident that some slight easing in the downward path of the German growth process is now taking place, the recent data are simply too consistent on this front to be ignored. As I mentioned at the start, the IFO reading was not as weak as might have been expected, the GFK consumer confidence reading remained stationary, unemployment continued to fall on a seasonally adjusted basis, while the January retail sales data and February retail PMI readings indicate an underlying expansion in German retail sales for the first time in several months.
Of course how long this process will last, and how important the turnround will prove to be, is very hard to say at this point. Looking at the general economic environment I wouldn't be betting on any kind of very strong upswing, but the numbers are interesting, and I wouldn't be surprised at all to see the recovery in the January export situation being carried over into February. An Eastern Europe effect perhaps? Certainly several economies are still accelerating there, almost to overheating, and the strong growth rates in German exports to Poland, the Czech Republic and Russia are unmistakable signs of something.
It is also significant that we can see some slight consumption effect in provisional results released by the Federal Statistical Office for turnover in the German retail trade in January, with sales up by 2.7% in nominal terms and 0.6% in real terms 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 be reasonably confident that the sales climate has improved somewhat. In fact February was the first month in almost a year when German retailers anticipated that their future sales performance would exceed their initial plans. The last time the retail PMI registered a monthly sales expansion was back 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 everything will become clearer as the days pass. One thing we should not be expecting though is any large and significant expansion in private domestic consumption to prop the economy up when exports do finally falter. Overall final domestic consumption expenditure now constitutes an almost permanent impediment to German economic growth. In particular we might note how final consumption expenditure by private households fell markedly (–0.8%) in Q4 2007 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 proved 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? It certainly look this way, but at the end of the day only time will tell.
Friday, March 14, 2008
If we look at the monthly chart for permits issued we can see that the depth of the recession in construction activity (as measured by permits issued) was during the first months of 2007. Since that time the situation has gradually deteriorated less rapidly. It should be noted though that the number of permits was still down year on year in December (by 6.1%) so the industry is still contracting.
The harmonised consumer price index (HICP) for Germany, which is calculated for European purposes, rose 2.9% in February 2008 on February 2007. Compared with the previous month, the index was up 0.5%. The HICP estimate of 29 February 2008 was thus confirmed.
The driving force behind this month's inflation rate in annual terms are higher energy prices (household energy and motor fuels). Although the share of energy in the consumption expenditure of households is less than 10%, it accounts for nearly one third of the overall price increase. In a year-on-year comparison, and referring to energy products, prices were up especially for liquid fuel (+32.9%) and motor fuels (+11.8%; including Diesel fuel: +15.9% and supergrade petrol: +9.9%). Electricity prices, too, increased above average (+7.1%) on a year earlier, whereas gas prices were down by 1.4%. Not considering the price trend for mineral oil products, the year-on-year rate of price increase would have been 2.3%.
Prices of food and non-alcoholic beverages were up an average 7.4% from February 2007 to February 2008 (of which food: +7.8% and non-alcoholic beverages: +5.1%). Vegetable prices were down by 1.7% on a year earlier. However, marked price rises were again observed for milk, cheese and eggs (+23.7%) as well as oils and fats (+18.3%). Also, for fruit (+9.6%) as well as bread and cereals (+8.3%), consumers had to spend more than a year earlier. Among non-alcoholic beverages, prices were markedly up in February 2008 for mineral water, juices and lemonades (+6.3%).
Since April 2007 already, the price rise in education (+34.9% in February 2008 on a year earlier) has had an impact on the year-on-year rate of price increase. The reason is the introduction of tuition fees in some Länder. Marked price increases were also recorded for transport (+4.3%). Consumer-friendly year-on-year price trends were again observed for telephone and telefax equipment (–19.0%), information processing equipment (–18.5%) as well as photographic and cinematographic equipment (–10.2%).
The 0.5% price increase on January 2008 is mainly due to seasonal price rises for package holidays (+8.6%) and accommodation services (+4.1%). Among seasonal goods, prices were up, among other things, for liquid fuel (+3.0%).
Prices of food and non-alcoholic beverages remained stable on the previous month (+0.1%), with marked price decreases observed especially for vegetables (–4.7%; including lettuce or iceberg salad: –26.4% and tomatoes: –18.5%). Particularly striking was the price trend for some foods: Following the considerable price rise a year earlier, butter cost 3.4% less than in the previous month; since December 2007, butter prices were down 13.7%. However, consumers had to spend 6.2% more on margarine as a butter substitute in February 2008. Price rises were also observed for chocolate bars (+6.3% on January 2008), following relative price stability in 2006 and 2007.
Tuesday, March 11, 2008
Following on from the relatively good export results in January, and the fair showing on the manufacturing and services PMIs it seems the German economy has been enjoying a sort of mini "Indian summer" in January and February, on the back of strong exports, not to Asia but rather to Eastern Europe and it will be interesting to watch how the German economy reacts gowing forward to the strains which are being produced in inflation and other overheating issues which seem to be arising in one of these countries after another.
Sunday, March 9, 2008
Of the big-four countries, only Germany saw an acceleration in output growth, with German manufacturing activity weakening slightly in February - to 54.3 from 54.4 in January - but remaining robust, with employment growth holding near the strongest level on record. NTC said its measure of employment growth in the manufacturing sector fell to 55.3 in February, just below January's 55.6, which was the highest since the survey began in April 1996. A gauge of output advanced to 56.0, the highest since September, from 55.7.
However, there were signs the pain being caused to exporters by the strong euro was worsening, and the index of new export orders slipped to 52.5 from 52.7 while a measure of input prices jumped to 65.1, the highest since July, and up from 62.8 in January. So factory gate price inflation is on the way up as manufacturers evidently seek to pass through some of their higher raw material and energy costs to clients.
German services Purchasing Managers' Index rose to 52.2 in February from 49.2 in January, and the index reading was the highest for three months. Tim Moore, economist at NTC Economics said “German service sector activity expanded at a below-trend pace in February, despite service providers registering an improvement in new business volumes for the first time in three months.”