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Thursday, July 31, 2008

German Employment Growth Continues To Slow In June

In June the number of persons in employment in Germany was 40.20 million, according to the latest data from the Federal Statistics Office, an increase by 564,000 persons (+1.4%) when compared with June 2007. Compared with May, the number of persons in employment was up by 35,000 (+0.1%). So the trend of a slightly decelerating rise in employment continues, which was also observed in the last few months. The rate of job creation reached its maximum in October 2007, and has been slowing steadily since.




Slightvariations are occuring in the data at the present time, since the Federal Statistics Office is conducting a revision of the national accounts, and previous provisional monthly, quarterly and annual employment results are being recalculated from the year 2004. All additional sources of employment statistics that had become available by the time of the current calculation were incorporated into the employment accounts.

German unemployment, which has been enjoying its longest decline since reunification in 1990, fell at a slower pace in July reflecting the general slowdown in the economy. The number of people out of work, adjusted for seasonal swings, dropped 20,000 in July to 3.25 million after falling 38,000 in June, the Nuremberg-based Federal Labor Agency said today. According to the latest ILO comparable data, Germany's jobless rate was 7.3 percent in June.


Wednesday, July 30, 2008

EU Sentiment Indicator For The Eurozone Declines Sharply In July

Economic sentiment in the euro zone deteriorated much more than expected in July to reach its lowest level in over 5 years. In fact Europeans' confidence in the outlook for the economy dropped the most since the Sept. 11 terrorist attacks as soaring energy costs and the euro's advance against the dollar wieghed down on both consumers and executives, with the economic sentiment indicator falling to 89.5 points, its lowest since March 2003, from a downwardly revised 94.8 in June.




Sentiment in industry declined by 3 points to -8, among consumers by 3 points to -20, in the retail sector by 5 points to -9, and in construction by 3 points to -14. The services sector, which generates more than two thirds of the 15-country euro zone's gross domestic product, saw the steepest decline, by 8 points to 1. After the news was announced the euro slipped briefly from a session high against the dollar and bund futures rose.

The figures were the latest in a string of weak data, which may may point to a continuing contraction in the eurozone into the third quarter of 2008 following the now more or less inevitable contraction in the previous three months (Q2).




In Spain, we learnt this morning that retail sales suffered a record plunge year-on-year in June as a severe economic slowdown began to slam both multinational and domestic retailers.




The European Commission also said this morning that its Business Climate Indicator (BCI), which helps establish the phase of the business cycle, fell to -0.21 point in July from 0.13 in June, hitting its lowest since May 2005.Worsening business morale was accompanied by a slight fall in consumer inflation expectations for the next 12 months to 30 points from 31, the data showed.

Industry selling price expectations, however, jumped to 20 points from 16 in June, providing a mixed picture for the European Central Bank, which sees struggling to tame resurgent inflation as its principal responsibility at this point.

Retail Sales In Germany Fall Again In July

The latest Bloomberg Eurozone Retail Purchasing Managers' Index, based on a mid-month survey of economic conditions in the euro area retail sector, rose from 44.0 in June to 46.0 in July. By remaining below the 50.0 level, the index pointed to a further fall in sales during the month despite an easing in the rate of decline from the steep pace seen in June.


Retail sales fell sharply again in Germany, though to a lesser extent than in June. The month-on-month sales index rose from 44.9 to 46.4, but still indicated a rate of decline that was relatively steep by the historical standards of the series.



Of the five product categories covered by the survey, food & drink retailers reported a year-on-year increase in sales revenues in July. However, gains in annual sales in part reflected higher prices rather than improvements in volumes. For the third successive month, the steepest decline was reported for autos & fuel, as deteriorating consumer confidence hit car sales. Annual sales of pharmaceuticals were marginally lower following two months of growth. The rate of increase in prices paid for goods by retailers remained elevated in July, picking up on June to register the fourth-highest pace yet recorded by the survey. The prices index edged up to 67.3, from 67.1. Purchase price inflation hit record highs in both Germany and Italy, but eased to a ten-month low in France.


Retail sector employment fell for the fourth month running in July, with the rate of job losses unchanged on June's twenty-eight month record. The employment index held steady at 48.6. All three countries registered shrinking retail workforces, with French retailers reporting the steepest rate of decline (and posting the largest monthly fall since January 2006). In Italy, headcounts at retailers fell for the seventh consecutive month. Retail staffing levels were also trimmed in Germany, but very slightly.

Sunday, July 27, 2008

GFK Consumer Confidence Falls in August To Its Lowest Level in Five Years Entering August

German consumer confidence dropped to the lowest in more than five years entering August as the sharp rise in energy and food prices continued to weaken purchasing power and the economic outlook continued to deteriorate. The GfK forward looking consumer confidence index for August declined to 2.1, its lowest level since June 2003 (and down from a revised 3.6 in July).



The sub-index measuring income expectations decreased to minus 20 from minus 7.2, while the consumers' propensity to spend component fell to minus 26.2 from minus 23.7. Economic expectations dropped to minus 8 from 7.5.



Along with fears of high inflation, many Germans are concerned that there will be a more marked cooling of the economy than previously anticipated. News from the USA of the continuing gloom in the financial markets support these assumptions and not least, the continuing high value of the euro represents a hazard to exports.
GFK's August Report



This is only the latest in a series of readings from the German economy which indicate a sharp slowdown may well now be underway (I analysed in some detail the reasons why we might expect this in my recent What Is The Recession Risk For The German Economy? article on the Roubini European EconMonitor). In a sense, given the high level of export dependence, and the complete lack of buoyancy in domestic consumption, this is exactly what we should expect to see as key export markets slow. The German Finance Ministry have already warned of a significant contraction in German GDP in the second quarter, and the signs now seem to be growing that German GDP may also contract in Q3, in which case the German economy may already be in recession.

The Ifo institute's German business confidence index dropped 3.7 points in July (to 97.5) when compared with May. This is its lowest level in three years, and the biggest one month drop since the fall which followed the 11 September attacks. Meanwhile manufacturing and services across the euro area contracted for a second month in July according to the latest PMI flash estimate, with the reading sliding more sharply than expected in July to 47.8 points from 49.3. This was well below expectations which had been for a decline to 48.7, and it was in fact the lowest reading since November 2001.





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. That's the biggest drop since June 2004.




German industrial production declined for a third consecutive month in May. Seasonal and inflation adjusted output was down 2.4 percent from April, when it fell 0.2 percent. That is the largest month on month fall since February 1999. Output was up 0.8 percenton May 2007, on a working day adjusted basis.



Record oil and food prices pushed inflation in Germany to 3.4 percent last month, squeezing disposable incomes just as the euro's gains and a slowing global economy coupled with problems in some key eurozone economies like Spain and Italy curbed the demand for exports.



It appears that the rate of inflation is initially stagnating around the three percent mark. This means that consumers are watching any pleasing increase in their purchasing power generated by the significant wage and salary increases in some industries being steadily demolished by inflation. Even the positive effects on income of a buoyant job market are negated by price increases and so relegated to the background for the moment.
GFK's August Report



In addition German producer prices rose at their fastest pace in 26 years in June, adding to pressure on the European Central Bank to keep interest rates high even as economic growth slows. Producer prices increased by 6.7 percent from a year earlier, the most since March 1982, after rising an annual 6 percent in May.


All of Europe's largest economies have been showing signs of slowing since the end of the first quarter. In Italy, business confidence slipped to its weakest since October 2001, according to the Isae Institute index. Spanish consumer confidence is at all time lows, while in France business confidence fell to the lowest in more than three years in July. The UK is now slowing very rapidly on the back of a credit crunch induced slowdown in the housing market.

The possibility that we may see a eurozone wide contraction in the second quarter is now a real one, and if Germany continues to contract in Q3 (as well as Spain and Italy: Spain is already in recession IMHO) then we may even see a whole zone contraction in the third quarter, giving the zone what will effectively be the first recession in its short history. Certainly the flash PMI reading for the whole eurozone manufacturing sector (which fell from 49.2 points in June to 47.5 in July) suggests that a Q3 contraction is now a real possibility. With both manufacturing and services indicators well below the 50-mark separating expansion from contraction this certainly constitutes an unequivocal recession warning. To be watched, and closely, in my considered opinion.

Thursday, July 24, 2008

German Business Confidence Falls Sharply In June

The Ifo institute's German business confidence index dropped 3.7 points from a month earlier to 97.5 in July. This is the lowest in three years, and the biggest one month drop since after the 11 September terrorist attacks. Meanwhile manufacturing and services across the euro area contracted for a second month in July according to the latest PMI flash estimate, with the reading sliding more sharply than expected in July to 47.8 points from 49.3. This was well below expectations which had been for a decline to 48.7, and it was in fact the lowest reading since November 2001.




Ifo indexes measuring current conditions and expectations also fell sharply. The July current conditions index declined to 105.7 from 108.3 in June, below the consensus forecast for a drop to 106.2. The expectations index, which measures sentiment about prospects in the next six months, fell to its lowest level since November 2002, dropping to 90.0 from 94.6 in June, compared to expectations for a drop to 93.3. Thus we have to face the possibility that the eurzone's biggest and most competitive economy may be on edge of a severe and sharp growth slowdown.

IFO themselves draw the following conclusion:

The Ifo Business Climate Index for industry and trade in Germany has fallen again significantly in July following a clear worsening in the previous month. The firms are much more dissatisfied with their current business situation and they are clearly more reserved regarding the six-month outlook. These results suggest that the economic upswing is coming to an end.


In addition Germany's manufacturing sector seems to have put in its weakest performance in nearly three years in July as new orders fell, although growth in the service sector picked upsomewhat. The flash estimate from the Markit purchasing managers index (PMI) for manufacturing dropped to 50.9 from 52.6 in June

On the other hand the services PMI rose to 53.3 in July from 52.1 in June.
Chris Williamson, chief economist at Markit, said manufacturing in Europe's largest economy was at "a virtual standstill", with the index of manufacturing orders slipping to its weakest level in over five years this month.
"Given the order book situation, manufacturing exports and total order books, backlogs of work have fallen for the third month in manufacturing, suggesting there is poor pipeline to drive output in the coming months," he said. "On that basis I would expect output to fall in August and perhaps fall beyond that depending on the exchange rate and oil prices and so forth,"


German manufacturing orders have now fallen for six months in succession, and the Finance Ministry has already said that the economy most probably contracted "considerably" in the second quarter after growth of 1.5 percent in the first three months of 2008.


The decline in German confidence was part of a series of data today suggesting ECB President Jean-Claude Trichet may be too optimistic when he says growth will rebound later this year. Confidence among Italian executives fell to the lowest since 2001 in July, French business sentiment was the weakest since May 2005 and Spanish unemployment in the second quarter rose to the highest rate in 3 1/2 years.

Saturday, July 19, 2008

What Is The Recession Risk For The German Economy?

Christian Menegatti in his Global Recession Watch post on RGE Monitor last week strang together an impressive list of countries which might be at risk of entering recession during 2008. One name which was conspicuously absent from the list was that of Germany. Yet the situation here is not as self evident as some may assume, and one of the aims of this post is to pose the question: just how realistic it is to expect an export dependent German economy to avoid recession when so many of its most important customers - the UK, the US, Spain, Italy... - are either skirting or entering recession even as I write? Indeed Sebastain Dullien implicitly asks this same question in his most recent post here on Europe EconMonitor.

As Sebastian points out there are now a growing number of indicators which suggest that the German economy is not only slowing, but slowing comparatively rapidly. And maybe one indicator here says it all: industrial output. Increasing industrial output to fuel rapid growth in export demand has been at the heart of Germany's most recent expansion, and, as can be seen from the seasonally adjusted output index in the chart below, industrial output has now been declining for three consecutive months (as of May data, released 07/07/2008).




In addition all the main sentiment indicators are now down (including the EU Composite Economic Sentiment Indicator, which came in at 101.5 in June, its lowest level since January 2006). The latest Ifo institute business climate index fell to 101.3 in June (again its lowest level since January 2006) down from 103.5 in May, and the Sentix institute index (released this morning) fell to minus 9.3 from a positive 5.2 in June. That's the lowest since June 2005 and the biggest one-month drop since the start of the index in February 2001.



The GFK consumer confidence index was also down this month, with the forward looking index for July dropping to 3.9 from a revised 4.7 in June. Again this is the lowest reading in quite some time. In particular in their monthly report GFK highlighted how continuing high inflation was eroding income expectations and the consumer propensity to buy. According to the latest flash estimate from the German federal statistics office, inflation is thought to have hit 3.3% annually in June, and if confirmed this will be the largest price increase since December 1993.




German manufacturing orders declined in May, the sixth straight month that orders have been down. Orders, adjusted for seasonal changes and inflation, fell 0.9 percent from April, according to data from the Economy Ministry last week.

And The Real Economy Is Faltering

So much for the sentiment indexes, but what about the real economy? Well if we look at retail sales these were up by 0.7% in real terms in May over May 2007. However, if we look at a longer term time series, we can see that, despite the comparatively positive general economic environment, sales have not been strong for some time now, and in fact they have only registered monthly year on year increases five times since January 2007.




Despite the fact that May saw quite a sharp increse over April - 1.3% in real terms m-o-m sales seem to have contracted again markedly in June according to the last Bloomberg retail PMI reading. The index slumped from May's eighteen-month high of 56.6 to the low level of 44.9 (remember that on the PMIs 50 marks the neutral point, with readings over that level indicating expansion, and below contraction. Looked at this way it would seem sales were contracting almost as fast in June as they were expanding in May).

If we look at the monthly (seasonally adjusted) sales index we find ouselves with a very clear before and after picture, with the sharp pre tax-increase spike in December 2006 being followed by a huge trough in January 2007 following the 3% VAT hike. After that retail sales have never really fully recovered, suggesting that raising consumer taxes may not be as harmless a move as many seem to have thought, and is certainly not the most advisable way to finance the fiscal liabilities presented by population ageing.




If we now turn to industrial production - which, as I say has really been at the heart of the current German expansion - we find that output declined for a third consecutive month in May. Seasonal and inflation adjusted output was down 2.4 percent from April, when it fell 0.2 percent, according to data from the Economy Ministry in Berlin this morning. That is the larges month on month fall since February 1999. Output was up 0.8 percent on May 2007, on a working day adjusted basis.



Manufacturing output was down 2.6% month on month, while construction was up 1% from April, but construction in April was already at a very low level. The seasonally adjusted index peaked in February, and has since been declining, as can be seen in the chart below.

Coming to employment, German unemployment declined in again in June, pushing the jobless rate to its lowest level in almost 16 years. The number of people out of work, adjusted for seasonal changes, fell 38,000 from May to 3.27 million.



And employment is still increasing. There were a total of 40.19 million people employed in Germany in May, an increase of 619,000 (or 1.6%) on May 2007. Compared with April 2008, the number of persons in employment was by 111,000 ( or 0.3%).




Thus the German job creation machine continued to function in May, although at a slightly slower pace than in previous months. From January to March this year, the number of persons in employment each month was by 1.8% higher than in the corresponding month of the previous year, while in April and May 2008 the increase had dropped slightly to 1.6% on April and May 2007. It is too early at this point to decide definitevely whether the current trend can be considered to mark a general slowdown on the labour market. At least part of the slowdown can probably be explained by the fact that the winter months had been unusually employment-friendly because of the mild weather, so that the usual upturn in spring was smaller, although of course this also means that growth in the earlier months of the year was not as stong as appears at first sight.

When looking at the unemployment numbers it is also important to bear in mind that the German labour force is now near its historic peak, and will now steadily decline. An indication of this can be found in the chart below where it can be seen that the rapid growth in the population available for work which characterised the years between 1997 and 2005 has now come to an end, and since 2005 the numbers have been stagnating.



This stagnation in the potential labour force (before an eventual decline if immigration is not leveraged to facilitate growth) is also a reflection of the fact that Gernamy's population is now, slowly but steadly, declining, and has been declining since Q4 2004, as can be seen in the chart below.



The only way to really swim against the stream in these conditions and to continue to achieve sustained GDP growth is by raising labour productivity, but this has been one of the weak spots in the current expansion. Overall labour productivity (price-adjusted gross domestic product per person in employment) rose only very slightly - by 0.1% - in Q1 2008 as compared with a year earlier, although as measured per hour worked, there was an increase by 0.8% (this is because the number of hours worked by those in employment rose much less than the number of persons in employment). The bootom line here is that a lot of the new jobs Germany has been creating are part time and temporary work, often in relatively low value activities.


Exports


The core of the German economy, and the principal driver of its GDP growth, is its export sector. Basically, as a crude first approximation, when German exports do well, the German economy grows, and when they don't it falters. In part this is simply the natural corrolary of the fact that German household consumption has remained congenitally weak. The chart below should make this relative co-movement reasonably clear.




Now in April, which is the latest month for which we have data, German exports continued to grow on a year on year basis, led by demand from countries outside the 27-member European Union. Sales abroad, on a seasonal and working day adjusted basis were up 1.2 percent in April over March, when they had fallen back 0.8 percent on February. April exports rose 14 percent on a year on year basis.



One interesting data point is that during the period January to April exports to countries outside the EU increased 11.6 percent from a year earlier (and by 18% April on April) while exports to EU countries rose 5.8% percent, and to the eurozone alone only 4.6%.

If we go back to 2007, which is the last period for which we really have a detailed breakdown of the export data, about three quarters of German exports went to European countries, and 65% went to the member states of the European Union. The second market after Europe was Asia with a share of about 11%, followed closely followed by the United States, with a share of approximately 10%.

So Europe (whether inside the EU or not) is the key to German growth, and this, of course, is one of the reasons why German exports have been so resilient to the rising value of the euro, since (at least until the problems of the property slowdown started to hit the value of the pound sterling) even those coutries who did not share the common currency (like the UK or most of Eastern Europe) had currencies which had by and large appreciated side by side with the euro itself. Of course all of this has now started to change, the UK has its own problems, and inside the eurozone, Spain and Italy are no longer increasing the volume of German products they buy in the way they were even six months ago.

On the other hand, even as some of the traditional customers have begun to falter, new ones have arrived to take their place to some extent, and in particular here new members of the European Union and Russia. To put things in perspective a little, in 2007, and despite all the talk about the "China factor", Germany exported roughly 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.

A detailed comparison of relative performance between 2006 and 2007 is even more revealing. Of particular interest is, for example, the fact that exports to China only increased by 8.7% in 2007 while exports to the Czech Republic rose at almost double the Chinese rate ( 16.9%). The importance of United States as an export destination, on the other hand, declined, since exports to the US were down from 78 billion euro in 2006 to 73.3 billion euro in 2007, a decrease of 6%. Exports to Poland (another important destination for German exports with 36 billion euro in 2007) were up 25.2%. Spain was also up considerably (as was Italy), rising from 42 billion euro in 2006 to 48 billion euro in 2007 (up 14.2%). The Russian Federation also stands out outside the EU, with exports there rising from 23 billion euro in 2006 to 28 billion euro in 2007, that is an increase of 20.6%. It is clear that the rate of increase of German exports to Russia has accelerated even further during 2008.

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's No 3 and No2 economies respectively (and both are CA surplus export-driven economies) - surely has some implications for the whole decoupling-recoupling debate.



Also, the dependence of the German economy for exports growth on Poland, the Czech Republic, Russia, Italy and Spain - all of which may find themselves with 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. At this point it is clear that German exports have been labouring in recent months more under the difficulties produced by the slowdown in Spain, Ireland and the UK than they have been suffering the direct consequences of reduced demand in the US.





Q1 2008 GDP

As I reported in detail here, the German economy started 2008 with what seemed on the face of it to be considerable momentum, since on a price, seasonal and calendar adjusted basis gross domestic product (GDP) was up by a very large 1.5% in the first quarter of 2008 over Q4 2007.




Perhaps rather surprisingly, economic growth in the first quarter of 2008 was primarily supported, not by exports, but by gross fixed capital formation. Compared with the fourth quarter of 2007, investment in machinery and equipment was up by 4%, and capital formation in construction by 4.5%. The latter, it has been suggested, being partly the result of a comparatively mild winter. Overall final consumption expenditure increased by 0.5% q-o-q, the first such rise in over a year, however breaking this down we find that government final consumption expenditure was up markedly (+1.3% q-o-q), while the final consumption expenditure of households showed a rather smaller increase (+0.3% q-o-q). But the big "little secret" of the German Q1 2008 data is that inventory levels were up sharply, and inventory building added a substantial 0.7% points (of the 1.5% total) to growth in the first quarter. Obviously this situation is most likely to be corrected in Q2, and this, together with the steady slowing of general economic momentum, is undoubtedly the reason Deputy Economy Minister Walther Otremba is predicting a contraction in Q2.

Exports continued to grow (+2.4%) but since imports rose even more strongly (+3.5%), foreign trade actually had a downward effect on gross domestic product in Q1 2008 when compared with the preceding quarter. So whatever else the Q1 headline number was about, for once this was not an exports story.

So we can draw two conclusions from all this rigmorole: firstly it would be far from in order to announce the Q1 2008 result as strong evidence for anything very important about the Germany economy or its future trajectory, and secondly, given that the inventory correction is virtually bound to take place (and that early construction momentum has almost certainly not been maintained - construction output was down 2.9% in April over March and by 2.3% over April 2007, and only bounced back 1% in May over April, so was still under the March level) we should not interpret a negative number in Q2 as meaning that Germany is actually entering recession at this point. Global trade is still growing (not as fast as previously, but still growing) and German exports are still sufficiently resilient at this point for this eventuality to be very likely.

For the German economy to enter recession the global economy will need to slow further - which all the signs are that it most probably will do, as country after country falls into the grip of higher inflation and increased central bank monetary tightening.

The important point to understand about the export sensitivity of the German economy is that this is a by-product of permanently weak household demand, which is, in my opinion, associated with the progressiving ageing and numerical stagnation of the German population.





Government Debt

Among the sources of support for the German economy in the coming quarters we should not count on the possibility of fiscal loosening. Germans debt to GDP ratio was 65% in 2007, down significantly from the 67.8% peak hit in 2005, and Germany has been gradually move the fiscal books back into balance (0% deficit in 2007) after four years of breaching the EU's 3% deficit limit (2002-2005). We should not expect any enthusiasm from the German government for hitting reverse gear at this point.




Indeed Finance Minister Peer Steinbrück is forecast this week to unveil a even tighter-than-expected 2009 budget in an attempt to stay on track with the target of completely eradicating the federal deficit by 2011. The draft budget will be put to the German cabinet on Wednesday and is thought to envision total federal spending in 2009 of €288.4bn, up 1.8 per cent from this year. The deficit is forecast to fall by €1.4bn to €10.5bn. The finance ministry’s four-year fiscal plan is said to be little changed from earlier versions and foresees a fall in the deficit to €6bn in 2010 and zero from 2011 onwards despite an average yearly increase in spending of 1.5 per cent.



Forecasts

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 in an interview this week. “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.

German Producer Prices Accelerate Again In June

German producer prices rose at their fastest pace in 26 years in June, adding to pressure on the European Central Bank to keep interest rates high even as economic growth slows. Producer prices increased by 6.7 percent from a year earlier, the most since March 1982, after rising an annual 6 percent in May, according to data on Friday from the Federal Statistics Office in Wiesbaden said today.



German energy prices rose 17.9 percent from a year earlier and prices for mineral oil products were 28 percent higher, the statistics office said. Excluding energy, producer prices rose 3 percent. From May, including energy, prices rose 0.9 percent.

Oil has risen more than 70 percent over the past year and reached a record of $147.27 a barrel on July 11. Inflation in Germany accelerated to 3.4 percent in June, the fastest pace in 12 years, and consumer prices in Europe gained an annual 4 percent, the most since 1992.



Higher prices are eroding purchasing power in Germany and curbing growth in an economy already burdened by a stronger euro and the slowdown in Italy and Spain. German investor confidence plunged to a record low this month according to the ZEW Center for European Economic Research.




Germany's Finance Ministry predicts economic growth will slow to 1.7 percent this year and 1.2 percent next, but there are now tremdous downside risks attached to this assessment, and there must be a 50% possibility that Germany will enter a recession sometime this year.

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.



Forecasts

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.

Wednesday, July 9, 2008

German Exports Fall Back In May 2008

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's the biggest drop since June 2004.



From a year earlier, exports rose 2.5 percent, today's report showed. The trade surplus narrowed to 14.4 billion euros ($23 billion) from 18.8 billion euros in April. Economists forecast a surplus of 17.3 billion euros. The surplus in the current account, the measure of all exports including services, narrowed to 7.5 billion euros from 15.5 billion euros in April.

Exports within the eurozone were down to 34.5 billion euros in May, the lowest level since September 2007, and only up 0.5% on May 2007. This is obviously NOT an impact from the higher euro, but a knock-on effect of the Spanish and Italian slowdowns.



Now given the structural export dependence of the German economy there is an inherent instability in the situation, ie German growth is more fragile and vulnerable than that of a domestic consumption supported one (like France say), and when the pack of cards folds, then it does tend to fold pretty quickly, which is why I am putting up the GDP and export growth co-movement chart (see below), since I think what we may well now see is a repeat of what happened at the end of 2001, when the sharp fall in the rate of increase in exports send headline GDP swiftly down. Basically not being able to fall back on domestic consumption is a tremendous liability, and again, there can be little fiscal support, if the German administration want to stick by their deficit ending commitments.



German Finance Minister Peer Steinbrück is reported to be about to unveil an even tighter-than-expected 2009 budget in an attempt to stay on track with the target of completely eradicating the German federal deficit by 2011. The draft budget will be put to the German cabinet on Wednesday and is thought to envision total federal spending in 2009 of €288.4bn, up 1.8 per cent from this year. The deficit is forecast to fall by €1.4bn to €10.5bn. The finance ministry’s four-year fiscal plan is said to be little changed from earlier versions and foresees a fall in the deficit to €6bn in 2010 and zero from 2011 onwards despite an average yearly increase in spending of 1.5 per cent.

Likewise I would also stress the high level of inter-locking with several key East European economies, and how developments there are also begining to grind German exports down.

To put things in perspective a little, in 2007, and despite all the talk about the "China factor", Germany exported roughly 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.

A detailed comparison of relative performance between 2006 and 2007 is even more revealing. Of particular interest is, for example, the fact that exports to China only increased by 8.7% in 2007 while exports to the Czech Republic rose at almost double the Chinese rate ( 16.9%). The importance of United States as an export destination, on the other hand, declined, since exports to the US were down from 78 billion euro in 2006 to 73.3 billion euro in 2007, a decrease of 6%. Exports to Poland (another important destination for German exports with 36 billion euro in 2007) were up 25.2%. Spain was also up considerably (as was Italy), rising from 42 billion euro in 2006 to 48 billion euro in 2007 (up 14.2%). The Russian Federation also stands out outside the EU, with exports there rising from 23 billion euro in 2006 to 28 billion euro in 2007, that is an increase of 20.6%. It is clear that the rate of increase of German exports to Russia has accelerated even further during 2008.

Now Slovakia, Hungary and Romania all reported slowing industrial output for May yesterday. Slovak industrial output growth slowed to an annual 4 percent, Hungary's production rose at what was a reduced pace for them of 4.7 percent and Romanian output growth slowed to an annual 2.7 percent from 13.3 percent in April. Polish output only rose 2.3 percent in May, the slowest rate in three years, while the key Czech Republic is due to report tomorrow with some eagerly awaited numbers.

This data, when put alongside Monday's industrial output data suggests that the German economy may well now be entering a significant slowdown. Basically, Southern Europe sneezes and Germany catches a cold, then the CEE economies cough and you get the full dose of pneumonia.

Monday, July 7, 2008

German Industrial Output May 2008

German industrial production declined for a third consecutive month in May, offering further evidence that Europe's largest economy is slowing, and reasonably rapidly.

Seasonal and inflation adjusted output was down 2.4 percent from April, when it fell 0.2 percent, according to data from the Economy Ministry in Berlin this morning. That is the larges month on month fall since February 1999. Output was up 0.8 percenton May 2007, on a working day adjusted basis.



Manufacturing output was down 2.6% month on month, while construction was up 1% from April, but construction in April was already at a very low level. The seasonally adjusted index peaked in February, and has since been declining, as can be seen in the chart below.



All the main sentiment indicators are now down (including the EU Composite Economic Sentiment Indicator, which came in at 101.5 in June, its lowest level since January 2006). The latest Ifo institute business climate index fell to 101.3 in June (again its lowest level since January 2006) down from 103.5 in May, and the Sentix institute index (released this morning) fell to minus 9.3 from a positive 5.2 in June. That's the lowest since June 2005 and the biggest one-month drop since the start of the index in February 2001.




The GFK consumer confidence index was also down this month, with the forward looking index for July dropping to 3.9 from a revised 4.7 in June. Again this is the lowest reading in quite some time. In particular in their monthly report GFK highlighted how continuing high inflation was eroding income expectations and the consumer propensity to buy. According to the latest flash estimate from the German federal statistics office, inflation is thought to have hit 3.3% annually in June, and if confirmed his will be the largest price increase since December 1993.




German job creation continued in May, although at a slightly slower pace than in previous months. From January to March this year, the number of persons in employment each month was by 1.8% higher than in the corresponding month of the previous year, while in April and May 2008 the increase had dropped slightly to 1.6% on April and May 2007. It is too early at this point to decide definitevely whether the current trend can be considered to mark a general slowdown on the labour market. At least part of the slowdown can probably be explained by the fact that the winter months had been unusually employment-friendly because of the mild weather, so that the usual upturn in spring was smaller, although of course this also means that growth in the earlier months of the year was not as stong as appears at first sight. So any definitive assessment of the state of the German labour market should be in "wait and see" mode at the present time, although the latest industrial output data make it hard to think that the labour market is not weakening.

German retail sales also fell markedly in June, reversing from the sharp rise posted in May, according to the most recent reading on the Bloomberg retail PMI. The index slumped from the eighteen-month high of 56.6 achieved in May to 44.9. (The PMI measures the rate of expansion or contraction. According to the Federal Statistics Office data retail sales expanded rapidly in May - 1.3% in real terms over April - but now we seem to have an equally rapid rate of contraction going into June).





The rate of increase in exports has been slowing of late, and all eyes must now be on the May data, which is due on Wednesday.

The median of five GDP forecasts published by the German economic institutes in June predicts 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. So while it is early days yet to reach any firm conclusion I would say that the possibility that the German economy will enter recession at some point in 2008 has now risen to over 50%.

Friday, July 4, 2008

German Factory Orders May 2008

German manufacturing orders declined again in May, making the sixth straight month that orders have been down and adding to signs that Europe's largest economy is now slowing significantly. Orders, adjusted for seasonal changes and inflation, fell 0.9 percent from April, according to data from the Economy Ministry this morning. Orders were down 2% from April 2007.

Domestic orders dropped 2.7 percent in May while foreign sales gained 0.8 percent. Orders from other euro-area countries increased 3.4 percent and demand from the rest of the world fell 1.2 percent in the month. Order growth over the past six months has ``cooled significantly,'' the ministry said in the statement. ``Overall it points to weaker developments in industrial production.''

German manufacturing growth is evidently weakening as near-record oil prices push up inflation and damp the spending power of companies and households just as a strong euro weighs on exports. The European Central Bank raised interest rates yesterday to a seven-year high to combat the threat of an inflation spiral.

Flash estimates for the German PMI at the end of June suggested that German manufacturing weakened in June, although the index reading - which fell to 52.3 in June from 53,6 in May - still indicated expansion.



The German services PMI also saw a decline, falling to 53.3 from May's 53.8 level.



Eurozone inflation accelerated to a 16-year high of 4 percent in June. In Germany, which accounts for about a third of the region's economy, annual price gains reached 3.4 percent, the fastest since records began.





Today's report is the latest to signal that Germany's economy, which so far has coped, is losing its momentum. German consumer, business and investor confidence fell last month. Plant and machinery orders dropped the most in three years in May, the VDMA machine makers association said earlier this week.
German business confidence fell to the lowest in more than two years in June, according to the reading on the Munich-based Ifo institute business climate index, based on a survey of 7,000 executives, which declined to 101.3 from 103.5 in May. That's the lowest since January 2006.




Consumer confidence is also falling GfK's index forward looking index for July 2008, which is based on a survey of about 2,000 people, declined to 3.9 from a revised 4.7 in June.



Also the German economy may well have contracted in the second quarter of 2008 after having expanded at the fastest pace in 12 years in the first three months of the year, according to Germany's Deputy Economy Minister Walther Otremba.

Tuesday, July 1, 2008

German Retail Sales May 2008

According to the latest provisional results from the Federal Statistical Office retail sales in Germany in May 2008 were up 3.5% in nominal terms 3.5% and in 0.7% real terms over May 2007. The number of days open for sale was identical in both years.





When adjusted for calendar and seasonal variations, sales turnover was up 1.7% in nominal terms and 1.3% in real terms over April 2008. That is quite a significant increase m-o-m.

Compared with the corresponding period of the previous year, retail turnover was up 2.2 % in nominal terms and down 0.4% in real terms in the first five months of 2008. German sales also fell markedly again in June, reversing from the sharp rise posted in May according to the Bloomberg retail PMI reading. The index slumped from the eighteen-month high of 56.6 achieved in May to 44.9. (The PMI measures the rate of expansion or contraction. As we have seen retail sales expanded rapidly - 1.3% in real terms over April - and now we seem to have an equally rapid rate of contraction going into June).


The monthly index really shows a before and after picture, with the sharp spike in December 2006 being followed by a huge trough in January 2007 following the 3% VAT hike. After that retail sales have never really recovered, suggesting that raising consumer takes in the way may not be as harmless as many thought, and it is certainly not the most advisable way to finance population ageing.


If we now look at the annual index, it seems to be the case that sales peaked in 2006, and since Germany's population is now falling, it would seem to be more than just idle speculation to ask whether German retail sales will ever rise again on an annual basis.