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Thursday, May 28, 2009

Exports And Investment Drag German GDP Down In First Quarter

German exports and investment spending plunged in the first quarter, dragging Europe’s largest economy into its deepest economic slump on record.

Exports were down 9.7 percent from the fourth quarter and company investment declined 7.9 percent, according to the Federal Statistics Office. The Office reported that gross domestic product fell a seasonally adjusted 3.8 percent from the previous three months, confirming an initial estimate from May 15. That’s the largest drop since quarterly data were first compiled in 1970.

From October to December 2008, the German economy had already contracted by 2.2%, and by 0.5% in each of the the second and third quarters.

According to the statistics office, the decline in economic performance was mainly due to movements in the balance between exports and imports of both goods and services. As in the fourth quarter of 2008, German exports fell much more than German imports in the first three months of this year. While exports declined 9.7 % year on year, imports were down 5.4%, so that the chnaged balance of exports and imports contributed minus 2.2 percentage points to the decline of GDP.

The negative first quarter evolution was also characterised by a notable decline in investments (– 7.9%, quarter on quarter). Capital formation in machinery and equipment, in particular, was much lower than in the last quarter of 2008. Companies invested 16.2% less in machinery, equipment and vehicles than in the last quarter of 2008.

The decline in capital formation in construction was small in comparison with a drop of 2.6% on the quarter. Inventories were also run down considerably during the quarter, thus reducing growth by 0.5 percentage points. Growth was positive only only for household consumption and government consumption, which up by 0.5% and 0.3% respectively.

Year on year, German GDP was down by 6.7% in the first quarter of 2009. After calendar-adjusted, the figure is 6.9% , since there was half a working day more in the first quarter of 2009 than there was in 2008 (easter impact minus the leap year effect).

39.9 million people were employed in Germany during the first quarter, an increase by 48 000 persons (or 0.1%) on a year earlier. The number of unemployed (ILO definition) was just under 3.4 million, 7.8% of the entire economically active population.

The recession in Germany has hit industrial activity (including energy) particularly hard, and output was down 20.2% over the first quarter of 2008. Marked declines in real gross value added were recorded also by construction (– 8.9%) and by trade, transport and communications (– 6.4%). Financial, real estate, renting and business activities fell much less - by 0.9% compared with the first quarter of 2008.

In contrast to the bleak picture for investment, fixed capital formation and German exports, final consumption expenditure was ever so slightly up quarter on quarter - by 0.1% - and even did slightly better than in the last quarter of 2008 (– 0.0%).

On a year on year basis, household consumption was marginally down though - by 0.1% (following a 0.5% drop in the fourth quarter of 2008), but general government consumption expenditure was up by 0.8%.

The Long Term Outlook

The first-quarter drop in GDP marked an unprecedented fourth successive quarterly contraction for Germany’s economy. The government expects the economy to contract 6 percent this year, while ECB council member Axel Weber said earlier that while “rays of light” are positive, there’s “no reliable indication that the global economy is past the worst.” The euro-region economy may only “gradually stabilize during the latter part of 2009.”

The longer term decline in German GDP performance is now pretty clear (see chart below).

According to the Federal Statistics Office:

Measured in terms of gross domestic product changes at 1995 prices, the rates of economic growth in the former territory of the Federal Republic of Germany and - since 1991 - in Germany have continuously declined since 1970. While the average annual change was 2.8% between 1970 and 1980, it amounted to 2.6% between 1980 and 1991 and to 1.5% between 1991 and 2001.

Since 2001 the performance of the German economy has in fact been worse rather than better, much to the consternation of those who hoped that many years of sacrifice in the form of wage deflation and structural reform would lead to a rebirth of the country's former economic prowess. In reality the German economy shrank (0.2%) in 2003, and grew by only around 1% in both 2004 and 2005. And while the German economy picked up notably in 2006 and 2007 (with growth rates of 3.2% and 2.6% respectively) and many talking in terms of such grandiose notions as global uncoupling and "Goldilocks" type sustainable recoveries, the most striking feature of the recent German dynamic has been the way that internal demand failed to respond to the externally driven export stimulus. Of course, all the speculation came to an abrupt end in 2008 when the German economy once more entered recession as world trade expansion slowed and exports collapsed (with GDP only growing by 1% over the year), while 2009 looks set to be a lot worse (with the IMF currently forecasting a contraction somewhere in the region of 5%, and forecasts of up to minus 7% not seeming exaggerated).

What we seem to have here is "engine faliure" rather than mere "magneto problems" (using Claus Vistesen's memorable phrase for a very similar situation in the Japanese economy, and it would be nice if the current crisis could serve as the stimulus for an open, and "in the real world" debate about why this is. So some part of the traditional mechanism of economic transmission seems to have been broken, and the "second leg" of the economic cycle, the domestic consumtion driven one, seems no longer to work. Long term GDP growth rates in the German economy are clearly falling, and the decline looks clearly set to continue. Now falling and ageing population couldn't have anything to do with it, could it?


Anonymous said...

I appreciate your insights on the continuing saga of this ¨crisis¨.

I don´t want to beat a dead horse but I still cannot believe how the Euro is still trading so strongly against the pound and especilly the dollar. Economic indicators appear to not justify a euro which is at least 20% overvalued.
The longer the Euro stays at @1.40 to the dollar..now 2 weeks, the more likely hood that German exports,GDP, will suffer.
Would´t the ECB be wise to some how devalue the Euro in the near future? Why is Weber seemingly so against this and why is he overly concerned with inflation ..when its deflation thats becoming the reality... Seems almost like the Germans are so proud of the Euro they don´t want to deface it. The Mark doesn´t exist,but they, the Germans, seem to treat the Euro like its big brother ......

Edward Hugh said...

Hello, and just briefly, since I am on the Costa Brava for the weekend. Theoretically having a "rest".

"I don´t want to beat a dead horse but I still cannot believe how the Euro is still trading so strongly against the pound and especilly the dollar."

You need to read my post (maybe I suggested this before) "Don't Get Carried Away" on Global Economy Matters.

Basically, this is structurally inbuilt now. Dollar supremacy at the level of reserve currency is structurally unwinding. It won't be a dramtic process (I hope), but it may well be a lengthy and continuous one.

In a way this was what the French pioneers of the euro wanted, a currency to rival the dollar. Be careful what you ask for, I would say.

Also, the USD is now the carry trade of preference. What does this mean? Well, with Federal Reserve rates round zero, and likely to stay there for quite a long time, plus no dramatic recovery in the US on the horizon, it makes sense to invest in high yield (interest rates) emerging economies, where the local currency can also be expected to rise to boot.

Essentially this is very bad news for the Japanese, whose economy now is almost in meltdown mode. Previously, global expansions forced down the yen - which was then the carry trade of preference - and this also boosted exports.

With the USD now playing this role, and the US consumer no longer the global consumer of last resort, things ahve just gotten very difficult for the Japanese.

The problem the Germans face is similar.

"Why is Weber seemingly so against this and why is he overly concerned with inflation ..when its deflation thats becoming the reality..."

Well, this inflation obsession is probably the "original sin" of the Bundesbank. They are still living in 1923. Unfortunately, if the bout of deflation they get as a reward is as long and deep as I fear it might be, perhaps 2009 will then dominating their thinking for the next fifty years! Not an attractive outlook.

Anonymous said...

Margins are begining to be squeezed on an already weak Eurozone...

June 1 (Bloomberg) -- The euro’s steepest three-month rally against the U.S. dollar in seven years is sapping the earnings of exporters in the 16-country region and delaying its recovery.

That’s why Deutsche Bank AG, UBS AG and Barclays Capital, the largest currency traders, are urging clients to sell the euro, which strengthened 11.8 percent from Feb. 27 to close at $1.4158 on May 29, the sharpest rise since gaining a record 13.7 percent in 2002’s second quarter. Exporters from Adidas AG to Koenig & Bauer AG, the world’s second-largest sportswear maker and No. 3 printing-press manufacturer, say they are earning less overseas as a result.

Europe’s economy is lagging behind the U.S. The currency rose as the European Central Bank kept interest rates higher for longer than the Federal Reserve. Now, with ECB rates at 1 percent, there’s less profit to be made from lower U.S. borrowing costs than when the two were 2.25 percentage points apart last year. U.S. and German bond yields also converged.

Anonymous said...

Consumers in the U.S. continue to not spend for the month ending in april(according to a report today on bloomberg) Gasoline prices in the U.S continue to rise upwards, 2.60...

With rising unemployment(not even counting the ramifictions of chrysler and GM)foreclosures hitting records every month,and now rising gasoline prices,it appears to me that the markets have blown passed all realm of logic by continuing to think that a ¨recovery¨ is now underway in the U.S.
If two thirds of the U.S. economy is based on consumer spending..then where is this so called ¨recovery¨..?
The U.S. is one of the largest customers to the Eurozone...especially Germany...Germany is the motor of the EU...From which I continue to conclude there is no sustained rebound...less a so called recovery..
Is there a possibility that this could be a ¨W¨ shaped recession?
In other words..lowered expectations which have led to optimisim only to come crashing back down again when reality hits gain?
appreciate your comments Edward...

Edward Hugh said...


"Consumers in the U.S. continue to not spend for the month ending in april(according to a report today on bloomberg)"

Yep. I saw this.

In my view, what is driving things at the moment is straight carry. People are going to the US to borrow at rock bottom prices and invest in higher yielding assets. The China PMI is like a green light to go ahead, for the time being. Borrowing in the US and then converting to other currencies drives the dollar down, as it did, in its day with the yen. Those of us who have been watching Japan have seen all thios before. The rise in the Euro is only really an optical illusion, produced by growing demand to sell dollars (but not, note, from the Chinese). More probable US-based hedge funds etc.

I mean, as you highlight, US citizens are busying themselves saving, and there must be fierce competition between funds to offer yield and get their hands on those savings.

To get the euro down on the dollar at this point (and this point may last some years now, depending on when Bernanke "commits" to holding rates down and for how long) would mean becoming the "carry pair" of choice, and this would mean having rates beneath the US ones (hard) and getting the euro to be in downward motion against the USD over a reasonable time horizon (easier given the horrid fundamentals). But for the time being we are well and truly stuck I fear. Locked-in.

Effectively Axel Weber is acting as unwitting cheer-leader for the USD carry advocates, with all that talk about 1% interest rate floor, and "we aren't afraid of deflation", and inflation will soon be back. Investors are not such an unreasonable bunch, and they simply take him at his word.

"If two thirds of the U.S. economy is based on consumer spending..then where is this so called ¨recovery¨..?"

Not anymore it isn't. The US is in transition - at least temporarily - to an export driven economy and a trade surplus. This means getting the USD low enough for US products to become attractive without too much deflation, and lending money to places like India and Brazil to create customers for the exports.

"Is there a possibility that this could be a ¨W¨ shaped recession?"

Well what we are seeing at the moment looks more and more like an "L" to me, with the inclination in the horizontal part of the "L" tending ever so slightly upwards.

Output has stopped falling (hopefully) but I think anyone expecting a rebound is in for a long wait, especially as governments start to cut back their support as we enter next year.

"In other words..lowered expectations which have led to optimisim only to come crashing back down again when reality hits gain?"

Definitely, the markets are getting way way ahead of themselves at this point.

Anonymous said...

Looks like the worst is getting even worse with the strong Euro..
Exports TUMBLED whlist the euro was weaker(1.29-1-33)...I can't imagine with whats occuring globally that exports(German) and Eurozone GDP will improve from where they are at...and THEN factor in the EURO(+1.40)...
Bad times indeed cometh..

June 3 (Bloomberg) -- European consumer spending and exports contracted the most in at least 14 years in the first quarter and investment slumped as the worst global recession in more than six decades prompted companies to cut output and jobs.

Gross domestic product shrank 2.5 percent from the fourth quarter, matching an initial estimate and the most since the data were first compiled in 1995, the European Union’s statistics office in Luxembourg said today. Household consumption contracted 0.5 percent, while exports dropped 8.1 percent and imports declined 7.2 percent, all the most since the series started in 1995. Investment spending fell 4.2 percent, after a 4.3 percent contraction in previous quarter that was also the sharpest since 1995.

Even with evidence building that the worst of the economic crisis may be over, euro-area unemployment has risen to a 10- year high as payrolls start to reflect the severity of the recession with companies from ThyssenKrupp AG to Air France-KLM Group firing workers. European Central Bank President Jean- Claude Trichet, who said on May 7 that he saw “tentative signs” of stabilization in the economy, will unveil the bank’s latest economic forecasts tomorrow.

“The big danger is that if unemployment continues to rise, that’s going to limit recovery prospects,” said Howard Archer, chief European economist at IHS Global Insight in London. “Even the fear of unemployment is going to cause consumers to be worried and hold back on spending.”

Anonymous said...

Well the Oil inventories in the U.S: reflect what I suspect is occuring because of the huge price increase in gasoline. Drivers are cutting back. This is especially significant because memorial day weekend is when gasoline draw downs are supposed to be the biggest...And if you use last year as a model(run up in gasoline prices to consumer sending ratio), when the consumers started cutting back on driving they also curbed there disposable spending signficatly..Why do I add this to the German Economy watch? Because the U.S. is germany´s biggest Export customer.
Thanks Edward for explaining the carry trade and its implications on the dollar in your previous response to my po
st. I would only add my opinion that I think the Euro will decline some 10% from current levels..(1.42)
You explained how it will happen..I would only comment that I think the correction will come soon(3 months).

June 3 (Bloomberg) -- Crude oil fell the most in two weeks, ending a rally, after a government report showed that U.S. supplies unexpectedly increased as fuel consumption plunged to a 10-year low.

Inventories climbed 2.9 million barrels to 366 million in the week ended May 29, according to the Energy Department. The gain occurred as imports surged 9.9 percent and refineries increased operating rates to the highest level in six months. Fuel demand fell to the lowest since May 1999.

“The high inventories and weak demand we’re seeing don’t justify prices in the $60s,” said Chip Hodge, who oversees a $9 billion natural-resource-company bond portfolio as managing director at MFC Global Investment Management in Boston. “The fundamentals are catching up with the market. Prices have gotten ahead of where they should be.”

Anonymous said...

Just wanted to clarify my gasoline price rise to consumer spending ratio...
Last year consumer disposable spending started to flatten with gasoline at an average price of about 2.70..
Well gasoline is about a dime lower then that right now...
Of couse last year at that time(May08) unemployment was not falling like it currently is, nor were foreclosures soaring,and home prices were at least 15% more in value then what they are now...And GM and Chrysler existed along with all its dealers and auto parts suppliers..(that is changing and its a unknown what the impact will have..not good I suspect)
add that all up and it looks to me like less consumer disposible spending then last year at this time...
But of course we now have the so called Obama stimulas coming down the pipeline..That I would argue is precisly why it should being looked as nothing more then a sugar high...
George Bush did the same thing last year and caused a temporary spike in GDP for the 3rd quarter of last year(I may have the quarter wrong but it was last year and it was caused by a so called ¨economic stimulas plan¨ designed to help consumers open three wallets and buy stuff)
I just got a letter in the mail recently saying I´m to recieve a $280.00 check from the U.S Government and its being called once again a stimulas plan...
This was especially funny to me since last years check I got had to be repayed by me when I filed for taxes this year!