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Monday, April 27, 2009

German Consumer Confidence Steady In April

German consumer confidence remained steady for a third consecutive month in April as slower inflation boosted household purchasing power and the pace of the economic contraction slowed slightly. GfK AG’s forward looking confidence index for May, based on a survey of about 2,000 people, remained unchanged from April's revised 2.5 percent reading.

This reading indicates that the German consumer climate remains robust overall, despite an economic environment which is generally recessive, with consumers still defying the gloomy signals they are recieving over orders and production. However, the index remains at a very low level and so, while domestic demand may provide partial relief from the heavy losses in exports and investment, it will by no means be able to offset them completely.

GFK emphasised that the greatest threat to future improvements in the consumer climate comes from the job market.

After dropping massively in March this year, the indicator of economic expectations was up again by 1.6 points in April to stand at its current level of -31.2 points. While consumers remain generally very pessimistic about the outlook, the downward plunge in the indicator which began in the middle of 2007 and continued until the beginning of 2009, has been gradually easing over the last few months.

Income expectations are also up in April - by 3.4 points - and now stand at -8 points. On this basis, and with the indicator recovering by 12.5 points since reaching its lowest point in January, the general rating for the year 2009 is positive in terms of income expectations. The key here is evidently the general stabilisation price index. In March this year, the rate of inflation was just 0.5%, which is attributable in the first instance to the reduced prices for energy and some foods, which added to consumer purchasing power. In addition, pensioners see themselves facing pension increases. From July 1, pensioners living in eastern Germany will receive a 3.4% rise and those in western Germany will be receiving 2.4% more.

Thus the propensity to buy indicator held up well, and although it has dropped 1.5 points, at its current level of 12.4 points it is still 17 points above the level at this time last year.

Thursday, April 23, 2009

Eurozone PMI Rebounds In March

Eurozone manufacturing and services sectors continued to contract in April, but the rate of decline continued to slow, according to the latest flash readings from the monthly surveys of purchasing managers. The preliminary Markit euro-zone PMI rose to 40.5 from a reading of 38.3 in March, a six-month high. The April services PMI rose to 43.1 from 40.9 in March, exceeding forecasts for a reading of 41.2. April manufacturing PMI rose to 43.1 from 33.9 in March, while expectations were for a reading of 41.2. A figure of less than 50 means a majority of purchasing managers saw a drop in activity, while a reading of more than 50 signals expansion.


Activity in German manufacturers and service sector firms dropped for an eighth straight month in April, athough the pace of the downturn was the weakest since last November. The flash estimate of the Markit composite purchasing managers' index rose to 39.7 in April from 38.3 in March.

"There's been a slight improvement in Germany but it's still underperforming
compared to other euro zone members," said Chris Williamson, chief economist at

Despite the fact that some recent short term indicators have suggested a slight easing in Germany's contraction, the economy is still expected to suffer an unprecedented contraction of five percent or more this year. The Mannheim-based ZEW institute reported this week that its monthly gauge of analyst sentiment rose to its highest level in nearly two years in April, and this has lead some economists to start predicting the German recession may end in the autumn.

German business confidence also rebounded rather more than economists forecast in April. According to the Munich based Ifo institute the April business climate index, based on a survey of 7,000 executives, increased to 83.7 from a 26 year low of 82.2 in March. Economists had expected a gain to 82.3.

Finance Minister Peer Steinbrueck appears to be much more realistic, pointing out that the economy could shrink by more than five percent this year, with some observers even suggesting a seven percent contraction may not be out of the question. Speaking in Berlin earlier this week Steinbrück said the country’s dismal economic performance in the past six months had made “a five before the comma not unlikely”. When speaking of the recent "dismal economic performance" he was presumeably thinking about first quarter 2009 GDP data which is due for a preliminary release next Wednesday. While Steinbrück was saying the “downward dynamic is not letting up”, Karl-Theodor zu Guttenberg, Anrea Merkel's economics minister, was more equivocal: “while we may not reach the bottom this year, we may come to a point where we can see the bottom”, he said. It depends how dirty the water is at those depths, I suppose.

Manufacturing industry has been especially hard hit in Germany, and the latest PMI showed the sector was still well in negative territory. April's manufacturing index rose slightly to 35.0 from 32.4 in March. However, in a vague sign of some slight improvement the new orders index rose to its highest level since October, and was up at 36.4 from 28.9 in March.

The composite PMI employment index fell to a new series record low of 40.8. The services sector index rose to 43.5 from 42.3, showing that, not surprisingly, most of the weight of the recession is currently being borne by the manufacturing sector.

"There's quite a long way to go yet before the labour market sees any stability. I think a protracted period of falling employment is on the cards," Markit Economics representative Chris Williamson said in his comments on the report.

And a sombre note was also added by Germany's leading economic institutes who forecast this week that the economy would shrink 6 percent this year, offering us the perspective of what looks set to be the country's worst economic performance since World War II. The institutes also suggest the German economy will stay in recession until at least mid-2010. An anticipated 23 percent decline in exports this year will prevent recovery, pushing Germany’s jobless rate to an anticipated 10.8 percent next year and lifting the budget deficit to nearly twice the European Union limit, according to their half-yearly forecast. Indeed the institutes suggest German GDP, which grew by 1.3 percent last year, may need until 2013 to return to the 2008 level.


The pace of decline in French private sector activity also moderated further in April, and the flash estimate of the Markit/CDAF composite purchasing managers' index rose for the second straight month to 43.5 in April after hitting 41.4 in March. Again this was the highest level in six months. The PMI for the manufacturing sector jumped to 40.0 in April from 36.5 in March, while the headline measure for the services sector rose to 46.2 from a March reading of 43.6.

New orders or business continued to decline in both segments of the economy, but at a slower pace than in March, offering hope that demand may be starting to stabilise. The business expectations index in the services sector was also up, jumping to 59.1 from 51.9 in March.

Some economists are now suggesting that the French downturn may have bottomed out in the first quarter of 2009, although the national statistice institute (INSEE) estimates GDP may have fallen by about 1.5 percent quarter on quarter, the sharpest contraction since 1975. So all of this is now a very hard question to call, although it may well be that France's contraction will moderate in the second and third quarters since the French economy is not export dependent and French consumers are not as heavily indebted as they are in some other Eurozone countries like Spain and Ireland.

That being said, Markit did sound a note of caution over April's PMI data, stressing that rising unemployment poses a substantial downside threat to any early recovery. April's composite employment index stood at 39.5 as the pace of job shedding in the private sector remained close to February's series record low of 39.2. "While the intensity of falls in activity and new business may have moderated, the danger now is of a protracted period of heavy job losses, which will drag on demand and enfeeble any recovery," according to the Markit statement.

However French manufacturers’ confidence did rise in April rose for the first time in 13 months, suggesting the easing in the slump in manufacturing may be having a positive effect on sentiment. The index, based on a sample of 4,000 manufacturers rose to 71, from 68 in March. The March reading had been the lowest since the series started in June 1962, so it would be very premature to start jumping to too many conclusions.

So all this needs to be kept very much in perspective. The Organization for Economic Cooperation and Development projects French unemployment to rise this year to almost 10 percent from 8.2 percent, while The International Monetary Fund estimate joblessness will reach 9.6 percent this year and that the French economy will contract by 3 percent.

Tuesday, April 21, 2009

German Producer Prices Fall In March And Investor Confidence Surges

German producer prices fell for the first time in five years in March, suggesting that the deflation risks are increasing in Europe’s largest economy. Prices were down 0.5 percent from a year earlier following an annual 0.9 percent gain in February, according to data from the Federal Statistics Office. That’s the first annual decline since February 2004 and the biggest drop since September 2002.

The ZEW Index Continues To Rise

The ZEW Indicator of Investor Sentiment continued to improve in April, and rose by 16.5 points to stands at 13.0 following a reading of minus 3.5 in March. For the first time since July 2007, The indicator was positive for the first time since July 2007, although it is still well below its long term historical average of 26.1.

According to ZEW the indicator has been positively affected by the German government stimulus packages. Furthermore, investors seem to be taking the view that low inflation rates may give some support private consumption. They also felt that the economic outlook for the United States has improved, and responded to some vaguely positive signals emanating from China.

“Along with other indicators, the ZEW sentiment indicator reveals that there are
well-founded expectations that the downward dynamics of the business cycle are
bottoming out. It is even becoming more likely that the economy will slowly
recover in the second half of this year.”, says ZEW President Prof. Wolfgang Franz.

Whether Franz is right in this very upbeat assessment really does remain to be seen, since I personally am far convinced that we have the bottom of this anywhere in sight yet, especially given German export dependence and the fact that year on year contractions in imports are still very strong in nearly all the major customers.

Thursday, April 9, 2009

German Industrial Output Continues To Fall In February

Industrial production in Germany, Europe’s largest economy, dropped for the sixth consecutive month in February as the global recession hit demand for German product, both at home and abroad. Output fell a seasonally adjusted 2.9 percent from January, when it slumped 6.1 percent, the most since data for a reunified Germany began in 1991. From a year earlier, output was down by 20.6 percent.

Although the pace of decline was slower than in January, this month’s drop was led by a 4.5 percent slump in production of investment goods, according to the Economy Ministry, and this certainly does not bode well for the future. The rate of decline in manufacturing activity continued to slow in March, although activity in the sector continues to contract at a sharp pace, according to the latest PMI which rose to 32.4 in March, up one point from February's figure. The March increase marks the second consecutive month of improvement after PMI reached a 12-year low in January of 32.0. Nevertheless, the figure remains well in contraction territory, with the average taken across Q1 as a whole notably lower than the previous quarter's figure. According to the PMI report, manufacturing output and new orders continued to contract, albeit at a reduced pace, while employment fell at a record pace over the month. "The sector's performance in Q1 was at least as bad as Q4 and therefore points to another heavy fall in GDP," Markit senior economist Paul Smith said.

In addition manufacturing orders plunged 38 percent in February from a year earlier, exports dropped for a fifth month, and German business confidence fell to the lowest level in more than 26 years in March. The economy may shrink as much as 5.3 percent this year before a “slow” recovery in 2010, according to the Organization for Economic Cooperation and Development.

Latest indicators suggest “that the decline in gross domestic product in the first quarter of 2009 could be even stronger than in the last quarter of 2008,” when the economy contracted 2.1 percent, Bundesbank President Axel Weber said last week.

Wednesday, April 8, 2009

German Exports Continue To Fall In February

German exports slumped 23.1% year on year in February, indicating that the sharp decline in global demand is having a very significant effect on German industry. Total goods imports declined 16.4% over the same period,. February's collapse in exports is almost identical to the January's one, when exports dropped 23.2% on a year-to-year basis, the sharpest decline since records began in 1950. Total goods exports, adjusted for workday and seasonal factors, fell 0.7% from January, while imports decreased 4.2% over the same period.

The weakness in demand for German goods was general and widespread. Exports to other European Union countries fell 24.4% year-to-year, while imports from those countries dropped 14.8%. German exports to other euro-zone nations declined 22.5% from a year earlier, while imports from the region were down 13.1%. Exports to countries outside the EU, fell 20.6% from a year earlier, while imports from those countries declined 19.2%.

Germany's trade surplus widened to €8.7 billion ($9.29 billion) in February from a revised €7 billion in January, as imports dropped more than exports. The country's current account surplus more than doubled to €5.6 billion from a revised €2.3 billion in January.

And the pain is far from over. German plant and machinery orders from abroad plunged 50 percent in February from a year earlier, the biggest drop since data were first compiled in 1958, according to the VDMA machine makers association. The country’s manufacturing industry shrank for a seventh month in March, according to the purchasing managers index, and business confidence - as measured by the Ifo index - dropped to a 26-year low.

And domestic demand is unlikely to counter the decline in exports, even as slower inflation boosts households’ purchasing power. Retail sales declined in February and consumer sentiment fell for the first time in seven months in March.

Looking ahead, German orders came outwell short of general expectations in February, falling by 3.5% month on month after an upwardly revised -6.7% (from minus 8%) in January. On a year on year basis, figures continued to worsen from -36.8% to - 38.2%. Domestic orders fell much more than foreign orders in February (-5.7% m/m against -1.3% m/m) but it is actually impossible to draw any conclusion from such extremely volatile monthly data. Foreign orders declined by 10.9% m/m in January and are still weaker than domestic orders on a yoy basis: -42.2% against -33.1%. Capital goods orders only posted a limited 0.5% decline in February but here again these figures are misleading. Non-Euro zone exports stabilized but after a 25% monthly collapse in January. Foreign capital good orders have been halved over the last 12 months (-48%), which has had terrible consequences for the German industry, as more than half the increases in German exports were due to these orders before the downturn.

Intermediate good orders and consumer good orders were also sharply down in February (respectively -6.5% m/m and -8.7% m/m) pointing to both still excess in inventories and weak consumer spending despite the success of car purchase incentives. Domestic consumer goods fell by 9.2% m/m, after -9.3% m/m, thus pointing to a significant acceleration in the downturn, as they are only down by 24.2% on a y/y basis. This seems to confirm what the fall in imports suggested this morning, ie substitution between durable goods consumer spending and all in all, no improvement in domestic demand triggered by the budgetary support. The fall in export orders also leads suggests it is advisable to be cautious as far as the comparative stabilization in month on month exports seen in February.