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Tuesday, December 23, 2008

What Is The Level Of Deflation Risk In Germany?

Only one thing is really clear about the Germany economy at the present time, and that is that it is shrinking rapidly. In fact it contracted far more than most analysts and observers expected in the third quarter (although I, for one, was not especially surprised), entering what now appears to be its worst recession in at least 12 years as both exports and domestic spending continue to fall. German gross domestic product in Q3 dropped by a seasonally adjusted 0.5 percent from the second quarter, when it fell by a quarterly 0.4 percent, according to revised data from the Federal Statistics Office. The Germany economy last had a two quarter contraction of this magnitude back in 1996.




And all the signs are that the fourth quarter will be worse than the third one, so the situation may even surpass the 1996 recession.


What's more the 2009 outlook promises to be even worse. The International Monetary Fund are now forecasting outright GDP contractions for the U.S., Japan and the eurozone next year, with Germany's economy expected to shrink by at least 0.8 percent (this as we will see is one of the most optimistic forecasts currently on the table for German GDP next year). The European Commission declared the 15-nation eurozone to be in recession in November, and just over 40 percent of the exports from this highly export dependent economy go to other eurozone nations.

The only positive elements in the Q3 GDP data are to be found in the slight increases in both final household consumption and government expenditure. On a seasonal and calendar-adjusted basis, household consumption expenditure rose by a quarterly 0.3%, while government final consumption expenditure rose 0.8%. Gross fixed capital formation rose slightly (0.1%) due laregly to a sharp uptick in construction over the second quarter (+0.3%, following –3.4% in the second quarter and +5.5% in the first).

In addition there was a large increase in inventories, and inventories contributed a whopping 0.9 percentage points to Q3 growth (see chart below), and without this build-up the contraction would have been much sharper - so watch out since this inventory increase which will more than likely be unwound in the fourth quarter, with considerable downside impact. Imports were up significantly (largely due to the rise in oil prices - oil peaked around $147 a barrel in July), while exports dropped, as a consquence movements in the net trade balance had a negative impact on final GDP.




Capital formation in machinery and equipment (ie investment) was down sharply (–0.5%), after increasing for seven quarters in a row. Thus the entire positive impact of domestic consumption and increased inventories was more than offset by a very rapid and sharp deterioration in the net export position. Between July and September exports were down by 0.4% over the previous quarter, whereas imports were up 3.8%. This meant that net exports contributed a whopping minus 1.7 percentage points to q-o-q GDP, and headline German GDP is extraordinarily sensitive to changes in the net trade position (see chart below).

Deteriorating Short Term Outlook

Looking forward into Q4, the signs, as I said, are for deterioration, as can be seen from the fact that (according to the latest flash PMI) German services contracted for the third consecutive month in December, even if the rate of contraction was slightly less than that in November.



Worse still, the contraction in manufacturing accelerated, and sharply so, clocking up its fifth consecutive month of contraction according to the flash estimate. The data released by Markit Economics showed German manufacturing registering its lowest reading for manufacturing since the survey was started in April 1996, with the indicator falling to 33.5, down 2.2 points from the November result and significantly exceeding the 1.3 point decline expected by the analysts. If we break the figures down we find that output tumbled all the way to 29.9 (from 32.3 in November), while new orders slipped 3.3 points to a record low of 25.8. Meanwhile, the employment component reached its worse level in the history of the index, coming in at 40.9 for the month from November's 43.6.




October Industrial Output Down


The PMI data are obviously only survey-based forward-looking estimates, but when we come to the actual data we find they are normally pretty near to the mark, since German industrial output fell strongly in October - dropping a seasonally adjusted 2.1 percent from September - according to the latest data from the Economy Ministry. Year on year working day adjusted output fell 3.8 percent. And November’s drop was led by a 3.1 percent month-on-month slump in the demand for investment goods, which means that companies are anticipating a serious slowdown in final manufactured goods further on down the line.





And the PMI is Confirmed By New Orders Data

I think nothing gives us a clearer illustration the dramatic nature of the industrial slowdown the Germans are now experiencing than the chart reproduced below which shows changes in monthly orders (both domestic and for exports) for German manufacturing industry over the last decade. As you will see (to use one of my choice phrases of late) we just went careering off a cliff.


New manufacturing orders dropped 6.1% in October from September, and in September they fell 8.3% from August. The quarter on quarter drop is huge - in the order of 40%.

Export orders are falling faster than domestic ones in the longer term during Sepetmber even domestic orders started to contract sharply as well - a 6.1% drop as compared to 6.2% for exports. What this suggests that the "second round effects" on domestic consumption from the drop in export sales are now hitting domestic manufacturing order books.

Exports Up Only 1.4% In October


Now it is, I think, generally accepted that German domestic demand is lacklustre, and has been for some years, and the German economy lives (or dies) from exports, so it is not without importance that according to the most recent provisional data from the Federal Statistical Office, October German exports were worth up only 1.4% (non price adjusted) and imports up 5.4% from their respective October 2007 levels. After calendar and seasonal adjustment, exports in fact decreased by 0.5% (and imports by 3.5%) month on month when compared with September.

The foreign trade surplus was 16.4 billion euros in October 2008, down from the October 2007 surplus of 18.9 billion euros.




Growth Outlook

It is very hard to put precise numbers on where the German economy is likely to go from here. Certainly GDP growth next year is going to be a shocker on the downside - with or without those notorious calendar adjustments. The Essen-based RWI economic institute are forecasting what now seems to be a "low end" prediction of a 2 percent contraction for next year, but even this would already be the biggest annual contraction since World War II. The have been joined by the IFO institute, who foresee a contraction of 2.2%. At the present time everyone is moving on the downside and accepting the reality of what is happening, with the Berlin-based DIW economic institute also cutting its forecast for the final quarter of 2008 to a contraction of 0.3 percent - down from previously anticipated growth of 0.2 percent (citing in justification the declines in industrial output and construction). The Kiel-based IfW suggested this week that the German economy will shrink 2.7 percent next year - the most pessimistic assessment by any leading research institute. Worse they are suggesting that equipment investment will drop 7.4 percent in 2009 (following a 4.9 percent this year) and that exports will decline 9 percent, (compared with an estimated gain of 5.1 percent in 2008). If these last two guess-timates are anywhere near right, then the German 2009 contraction will be very significant indeed, since exports are the key to the functioning of the German economy.

According to a report in the Frankfurter Allgemeine Zeitung earlier this month the Germann Economy Ministry currently estimate that the economy may shrink by as much as 3 percent next year.

Even further along the scale there is Deutsche Bank, who are forecasting a contraction of as much as 4 percent next year. Deutsche Bank chief economist Norbert Walter makes his forecast based on the deteriorating economic situation in Russia and in the Middle East, countries which have been vital in sustaining demand for German exports in recent months. As a fair weather pessimist on the German front, I feel that Walter may be near the mark than most, and my reasoning would be based on the severity of the downturn both in Russian and Eastern Europe, as well as the slump in Southern Europe, lead by Spain's sharp and resonant housing crash. Since these regions collectively are customers for a very sizeable part of German exports, I expect a pretty horrendous H1 for German GDP in 2009 - and the bad news could go on a good deal longer, since I am sure the East and Southern European agonies are going to drag on at least int0 2010.

Business Confidence Plummets


Certainly the omens for Q4 2008 are now clear enough. German business confidence has been falling sharply since the summer, and dropped to its lowest level in more than of a quarter century in December. The Ifo institute business climate index, which is based on a survey of 7,000 executives, fell to 82.6 from 85.8 in November, giving the main index lowest reading since November 1982. The drop was largely a product of a significant fall in the current economic situation component - which fell to 88.8 from 94.9 in December. Expectations remained largely unchanged at a very low level.


The main sub components all remained very low in December,but what is most striking is the rapidity of the deterioration we have been seeing in the manufacturing sector.




German consumer confidence has held up rather better (possibly a function of the resilience of the labour market, and the drop in inflation) and has remained largely unchanged following a fairly sharp deterioration in August. In December growing pessimism about the short term economic outlook was offset by a stronger willingness to buy, and GfK AG’s forward looking index for January, based on a survey of about 2,000 people, held steady at 2.1.


Employment Resists The Downturn

German unemployment continued to drop in November, despite the scale of the recession that just hit the country, and employers continue to retain and even recruit staff while orders slump. The number of people out of work, adjusted for seasonal variations, dropped a further 10,000 in November to reach 3.15 million, following a 26,000 fall in October, according to data from the Federal Labor Agency. The seasonally adjusted unemployment rate held steady at 7.5 percent, a 16- year low.



Meanwhile separate data from the Federal Statistical Office show that in October 2008 there were 40.84 million Germans in employment, an increase of 538,000 (or 1.3%) over October 2007 . In facr this was the highest number of Germans employed ever. Month on month the number of those employed was up by 219,000 on an uncorrected basis, which was equivalent to an increase of 39,000 ( or 0.1%) on a seasonally adjusted basis. So the great German jobs machine is still working.




The big question which is puzzling many economists however is why this increase in employment does not feed though to private consumption. My own personal feeling is that you need to look at the age profile of the German workforce, and the low value added content of much of the new employment. Some reflection of this can be found in the fact that (on aggregate) labour productivity (price-adjusted gross domestic product per person in employment) in the third quarter of 2008 was down by 0.1% year-on-year in Q3 2008. When measured on a per hour worked basis labour productivity was down by 0.2%.


So jobs are created, but household consumption expenditure hardly moves, and in fact it decreased by 0.3% year on year in Q3, despite the 0.3% increase quarter-on-quarter. So as unemployment has fallen German households have been spending less, especially on food, beverages and tobacco (–1.5%) and on transport and communications (–3.1%). The big factor in the latter decline was the marked decrease in private car purchases and the sharp drop in petrol consumption. As can be seen in the chart below, following the pre- VAT rise spike in Q4 2006, household consumption has remained decidedly lacklustre, despite the economy have had one of its most substantial expansions in over a decade.



If we look at the seasonally adjusted monthly retail sales chart (see below) we will see that these have been dropping steadily (stripping out the December 2006 spike) since mid 2006, and the decline continues.




Price Inflation Falls Dramatically


So to get back to the question I ask in the title to this post, we know that the German economy is going to contract sharply next year - by anything between 2 and 4 percentage points - so given the severity of this shock just what are the dangers that the sudden negative energy shock can push core inflation over into deflation mode?

Well, if we look at German producer prices - which can reasonably be considered a forward looking indicator for future prices, we find that they dropped sharply in November - in fact by the most since records began in 1949. This was of course a reflection pf the fact that the cost of oil declined drastically, but it is also an indicator of growing excess capacity as the global economic slowdown curbs demand. Producer prices fell 1.5 percent month on month, while the year on year rate fell back 5.3 percent. But if we look at the index itself (see chart) we will see that prices peaked in July (when oil prices were at a record), and have been falling steadily since.


And if we take a look at German consumer and producer price inflation together (see chart below), we will see that the energy price shock went in two waves. When the first wave petered out, consumer prices also fell, but they soon steadied, as the force of the expansionary momentum helped prices find a floor. But look what is happening after the second wave, producer prices are in virtual freefall, and these are dragging consumer prices along behind them, and when we think of the scale of contraction which we may well see in 2009, then it seems to me that the danger of opening up a deflationary dynamic behind the shock is a real and credible one.



In fact German consumer price growth slowed to 1.4 percent in Novermber according to the EU harmonized measure, down from 2.5 percent in October, falling significantly below the ECB’s price stability threshold of around two percent, and the lowest level in two years. Again this was the biggest decline since the federal statistics office started calculating German inflation using the HICP methodology in 1996. From a month earlier, prices were down 0.6 percent.

Again if we look at the index itself, we can see that prices have been falling since the summer, but if we dig a bit deeper, and take a look at the core index (that's the one to watch really, without energy, food, alchohol and tobacco, see chart below) then we will find that even on this measure prices have been stationary, and what we now need to watch out for is that the shock from the credit crunch driven GDP contraction addeded to the negative energy shock doesn't simply drive the core index into negative territory. It is impossible to say at the present time whether this will actually happen, but obviously the risk is real, and those over at the ECB would do well to remember this.






Fiscal Stimulus And Rising Deficit Pressure

Reactions to a problem of this magnitute will need to be on two fronts. The ECB obviously need to bring interest rates down rapidly and dramatically, and probably need to be thinking about how they can operate Japan and US style quantitative easing within a Eurosystem framework. On the other hand a fiscal response is essential, and Angela Merkel is reputedly considering a new package of measures in the early new year in addition to the stimulus package (estimated to have a net worth of about 31 billion euros in 2009) already announced.

The German Premier met the leaders of Germany's 16 states last Thursday to discuss additional measures, but no details of the package under discussionhave yet been announced. Angel Merkel did, however, suggest on Friday that the emphasis will be on infrastructure projects such as schools and roads - but since the areas of the Germany economy which are currently suffering most are the exports and capital goods sectors it isn't clear how much value this will really be.

But all of this has a downside, since it is now estimated that Germany will need to sell more debt next year than at any time since the end of World War II to finance the vaious measures being taken. Gross federal bond sales are set to expand by nearly 50 percent - to 323 billion euros ($471 billion) from 220 billion euros this year - according to the emissions calendar of the Federal Finance Agency. The 2009 issuance will be made up of 149 billion euros in bonds with a maturity of one year or more and 174 billion euros in shorter-dated money market securities.

The bond sales calendar is based on a budget that assumes economic growth of 0.2 percent next year, but as we have seen above this forecast is way out of line with what leading economic forecasters anticipate, thus the level of financing will likely be considerably greater at the end of the day, even without any additional stimulus packages.

Thus, following a 2008 budget which was basically balanced following a longer term strategy, Angela Merkel will now need to cope with a federal deficit which is certainly going to expand significantly as tax growth dwindles and spending rises. And bank rescue costs will come on top of the above, pushing the credit requirement up even further. Germany created a 480 billion-euro bank rescue fund in October comprising 400 billion euros in guarantees and as much as 80 billion euros in recapitalization steps, both of which will need to be financed in some form or other through the bond market. It is thought that around 200 billion euros will be approved in guarantees by the end of January and about 20 billion euros in capital measures. It seems however that bonds sold to boost banks’ capital reserves will be reported off budget, and thus not figure in accounts reported to the European Union's Eurostat office.
Germany plans to finance part of its 500 billion euro ($636 billion) bank rescue
package by issuing bonds to banks in exchange for new preferred stock, according
to Finance Agency head Carl Heinz Daube. ``The banks will not be allowed to sell
the injected government bonds,'' Daube said in an interview in Tokyo today. ``So
far there's obviously not a huge demand for any rescue measures, but this might
change in the coming weeks.'' Germany's rescue plan, approved by lawmakers on
Oct. 17, amounts to about 20 percent of the gross domestic product of Europe's
biggest economy. Chancellor Angela Merkel's administration pledged 80 billion
euros to recapitalize distressed banks, with the rest allocated to cover loan
guarantees and losses.

Despite the changed dynamic in public finance, however, the German government is unlikely to experience any real difficulties selling its debt, and the country continues to enjoy a "stable'' outlook from Moody's Investors Service on its Aaa government bond ratings according to a report published earlier this month.

"Germany's public debt payment capacity is strong and Moody's anticipates no problems with regard to affordability or adverse debt dynamics, even with the impact of the economic slowdown likely to be felt on both sides of the government balance sheet,'' said Moody's analyst Alexander Kockerbeck.

It is not clear, however that things are going to remain quite so cut and dry in the future, as the government continues to expand net borrowing on the one hand while slower economic growth even after the recession, on the other, will continue to restrain revenue growth. And as Germany's population ages, health and pension costs are set to mount, and to some extent all this fiscal strain is going to undo a lot of the impact of the "good housekeeping" measures taken in earlier years, making another set of painful reforms more or less inevitable as and when the recovery comes. Angela Merkel is undoubtedly well aware of this harsh reality, and this is surely part of the explanation for why she has tried to keep debt growth under control as possible - much to the chagrin of her EU counterparts in London and Paris, where the demographic dynamics are, of course, much more favourable - even as her budget expands to pay for the emergency fiscal programs.

"A balanced budget remains our target because the demographic changes in Germany will increasingly have an effect from the middle of the coming decade. We must not overburden the younger ones," Merkel said.

Monday, December 22, 2008

German Consumer Confidence Holds Steady - But At A Low Level - in December

German consumer confidence for January was unchanged as a deterioration in the economic outlook was offset by a stronger willingness to buy. GfK AG’s forward looking index for January, based on a survey of about 2,000 people, held steady at 2.1, the Nuremberg-based market-research company said in a statement today.



Germany’s inflation rate fell to the lowest in two years in November after crude oil dropped to $42.68 a barrel from a record $147.27 in July, boosting households’ disposable income. At the same time, the deepening recession and concern about job security is clouding consumers’ outlook for the economy and their own incomes, GfK said.



GfK revised last month’s reading from an originally reported 2.2.


Economic expectations: moderate decline

The downward trend in economic expectations is likely to last at least until the end of the year. The decline is currently running at -2.3 points down from November, signaling a further moderate decline in the indicator, which now stands at -32.4 points.

The outlook for economic growth in the German economy is hardly going to relieve the economic gloom. Reduced production, a steep fall in new car registrations and declining exports will put pressure on economic development in the coming year. As a result, the forecasts for 2009 have been significantly downgraded. In general, the experts are assuming that the German economy will shrink, but they are by no means unanimous about the degree of shrinkage. We shall have to wait and see how well the economic measures taken up to now work.



Income expectations: the mood is gloomy

Over the past four months, consumers seem to have remained comparatively optimistic despite the recession, however, this has changed towards the end of the year and income expectations dropped 8.5 points this month to their current level of just -15.4 points. The decline in the economy is leading growing numbers of those in employment to fear for their jobs and consequently, to be more pessimistic in their assessment of their own financial position. Anxieties concerning loss of income are currently taking precedence over factors which tend to increase purchasing power, such as lower petrol and heating oil prices.

In light of the weaker job market, there is a fear that actual wages and salaries are unlikely to rise much in the coming year. According to a recent purchasing power survey carried out by GfK GeoMarketing, net per capita income will increase by just a nominal 1.1% in 2009. Assuming the German Central Bank forecast is correct, which is based on inflation running at 0.8% in 2009, any increase in private means will be absorbed virtually immediately. In real terms, purchasing power is likely to rise only moderately, and much depends on the further developments in the job market, as well as relating to the financial crisis. Whether individuals are likely to have more disposable income depends mainly on whether they will be able to benefit from net growth in wages and salaries, or whether they will be affected by short time work or even lose their jobs.


Propensity to buy: slightly up

Unlike income expectations, the propensity to buy remained stable at the end of the year. Up 0.4 points, it even rose slightly. The indicator currently stands at -6.3 points, which is still below its long term average of 0 points.

The marked decline in inflationary pressure should be responsible for the current stability in propensity to buy. Further drops in petrol and heating oil prices are also benefiting the household budget and putting consumers into a better mood. This is reflected by the current seasonal Christmas business, and the positive news from retailers is being confirmed by the stable consumer climate.

Thursday, December 18, 2008

German Business Confidence Declines Further In December

German business confidence dropped to its lowest level in more than of a quarter century in December as the credit crisis pushes Europe’s largest economy deeper into a recession. The Ifo institute business climate index, which is based on a survey of 7,000 executives, fell to 82.6 from 85.8 in November, giving the main index lowest reading since November 1982. The drop was largely a product of a significant fall in the current economic situation component - which fell to 88.8 from 94.9 in December. Expectations remained largely unchanged at a very low level.





The main sub components all remained very low in December,but what is most striking is the continuing deterioration in the manufacturing sector.




This picture is confirmed by the flash manufacturing PMI, which dropped to 33.5 in December, from 35.7 in November, falling further away from the 50 level, which marks the limit between contraction and expansion of the sector's activity. Thus the pace of contraction is increasing in manufacturing.




The services sector continued to fare a little better, with the rate of contraction even slowing, and the flash PMI reading increased to 46.4 in December from 45.1 in November.

Wednesday, December 10, 2008

The ZEW Investor Sentiment Index Rebounds As Evidence Of Manufacturing Contraction Mounts

The ZEW Indicator of Economic Sentiment for Germany increased in December 2008 by 8.3 points and now stands at minus 45.2 points up from the minus 53.5 points registered in the previous month. However it is important to bear in mind that this is still well below the long term historical index average of 26.8.




The slight improvement in the ZEW economic sentiment indicator seems to suggest that worries among investors of a further deeping of the recession beyond mid 2009 are felt to be limited. It also suggests that interest rate cuts from the central banks worldwide and the economic rescue packages will lead to a renewal in economic growth in the second half of next year.


October Industrial Output Down


In the meantime the full blast of the present recession is now surely with us, and a very strong blast it is. Industrial production in Germany fell strongly in October as demand for new plant and machinery almost dried up. Output was down a seasonally adjusted 2.1 percent from September, according to the latest data from the Economy Ministry in Berlin said today. Year on year earlier, working day adjusted production fell 3.8 percent. This month’s drop was led by a 3.1 percent month on month slump in demand for investment goods.




With Worse To Come In November and December


The readings on the Ministry of Technology data fit in quite well with the results of the purchasing manager surveys (see chart below) and it is worth noting this suggested an even stronger rate of contract to come in November. Indeed German manufacturing hit a new low in November as far as the results of the PMI survey go, falling to a series-low 35.7, down on both the 36.7 flash reading and on October's 42.9 figure, according to last months data from Markit Economics.

According to the PMI report, the sharp deterioration in the composite PMI was reflected right across the components. The output component fell to a record low of 32.3 in November, from October's 41.1 level, while new orders slipped to 29.1 (so watch out for December), down 10.1 points from the previous month's 39.2. Employment also deteriorated notably, falling to 43.6, its lowest level since May 2003. The quantity of purchases and new export orders also hit new lows, coming in at 31.0 and 28.5 respectively.

Further, the price components registered notable declines. The input price category tumbled to 39.2 in November, its first sub-50 reading since September 2003 and the lowest level since October 2001. Meanwhile, the output price component fell to 48.1 from 53.3, the lowest level recorded since March 2004 and its first sub-50 figure since December 2005.




And the PMI is Confirmed By New Orders Data

I think nothing so confirms the dramatic nature of the industrial slowdown the Germans are now experiencing than the chart below which shows changes in monthly orders (both domestic and for exports) for German manufacturing industry over the last decade. As you will see (to use one of my choice phrases of late) we just went careering off a cliff.


New manufacturing orders dropped 6.1% in October from September, and in September they fell 8.3% from August. The quarter on quarter drop is huge - in the order of 40%.

Export orders are falling faster than domestic ones in the longer term during Sepetmber even domestic orders started to contract sharply as well - a 6.1% drop as compared to 6.2% for exports. What this suggests that the "second round effects" on domestic consumption from the drop in export sales are now hitting domestic manufacturing order books.

Exports Up Only 1.4% In October


According to the most recent provisional data from the Federal Statistical Office, Germany exports were worth 89.7 billion euros and imports 73.4 billion euros in October 2008. Exports were thus up 1.4% and imports up 5.4% from the respective October 2007 levels. After calendar and seasonal adjustment, exports decreased by 0.5% and imports by 3.5% month on month when compared with September 2008.

The foreign trade surplus was 16.4 billion euros in October 2008, down from last year's October surplus of 18.9 billion euros.




Growth Outlook

It is very hard to put numbers on where we are likely to go from here. Certainly GDP growth next year is going to be a shocker on the downside - with or without calendar adjustments. The Essen-based RWI economic institute forecast this week what now seems to be a "low end" prediction of a 2 percent contraction for next year, but even this would already be the biggest annual contraction since World War II. Everyone is moving on the downside and accepting the reality of what is happening, with the Berlin-based DIW economic institute also cutting its forecast for the final quarter of 2008 to a contraction of 0.3 percent - down from previously anticipated growth of 0.2 percent (citing in justification the declines in industrial output and construction).

At the other end of the scale Deutsche Bank forecast only this week that Germany’s economy will shrink in 2009 by as much as 4 percent next year. Deutsche Bank chief economist Norbert Walter makes his forecast based on the deteriorating economic situation in Russia and in the Middle East, countries which have been vital in sustaining demand for German exports in recent months.

Thursday, November 27, 2008

German Unemployment Holds Steady In November

German unemployment extended its decline in November, withstanding the worst recession in 12 years, as employers continue to retain and even recruit staff even as orders slump. The number of people out of work, adjusted for seasonal variations, dropped a further 10,000 in November to reach 3.15 million, following a 26,000 fall in October, according to data from the Federal Labor Agency out today (Thursday). The adjusted unemployment rate held at 7.5 percent, a 16- year low.




The German labour market normally follow broader economic trends only with a time lag - sometimes of as much as nine months, according to research by the Cologne-based IW economic institute. Since Germany’s recession began in the second quarter we may well only see the unemployment numbers begin to respond at the start of 2009.

Only this week both Volkswagen and Porsche have said that they plan to suspend production at their core plants in coming weeks. VW will close its factory in Wolfsburg from Dec. 18 to Jan. 11 and Porsche will halt output in Stuttgart for seven days between now and the end of January. Daimler has also reported that it is begotiating with worker representatives about cutting working hours at some of its car production plants in Germany. The company said Thursday it may scale back hours at Mercedes-Benz car manufacturing facilities in Sindelfingen, Berlin, Bremen and Duesseldorf.

Separate data from the Federal Statistical Office show that in October 2008 there were 40.84 million Germans in employment. That was up by 538,000 (+1.3%) on October 2007 and was the highest number of Germans in employment ever.

When compared with September 2008, an additional 219,000 persons were in employment in October. After eliminating seasonal variations, the number of persons in employment in Germany was 40.41 million in October 2008. Against September 2008, that was a seasonally adjusted increase of 39,000 (+0.1%).



There is a slight discrepancy between the two sets of data, since the organisations use a different methodology, and the Federal Statistics Office uses the labour force survey. Using this surbey they estimate unemployment figures according to International Labour Organization (ILO)criteria. According to their provisional estimates, the number of unemployed amounted to a seasonally adjusted 3.04 million in October 2008. Compared with October 2007, unemployment was down by a seasonally adjusted 12.6% or by 440,000 persons. The seasonally adjusted unemployment rate – which is harmonised across the EU and measured as the share of unemployed in the total labour force – amounted to 7.1% in Germany and was thus notably lower than in the same month one year earlier (8.1%).

Germany’s ILO harmonised jobless rate of 7.1 percent in September, compares with 7.9 percent in France, 4 percent in Japan and 6.1 percent in the U.S. The OECD average for September was 6 percent.

Tuesday, November 25, 2008

German Consumer Confidence Rises Slighly In November

German consumer confidence rose for a third consecutive month in November, a strange result when you consider the fact that Germany is in recession. GfK AG’s forward looking index for December, based on a survey of about 2,000 people, increased to 2.2 from 1.9 in November,according to a report from the Nuremberg-based market-research company published today. Basically we need to bear two things in mind here to understand this result, the substantial drop in oil (and with it in inflation) and the resilience being shown by Germany's labour market.




German inflation fell in October and the price of oil dropped to just over $50 a barrel from the July peak of $147, boosting households’ disposable income. On the other hand, Germany's worst recession in 12 years is continuing to affect consumers’ outlook for the economy, according to the GfK report.

“Many Germans don’t yet believe they will be significantly affected by the downturn,” GfK said in the statement. Still, a further improvement would “very much depend on how deep the recession is and how the labor market will be affected.”

Household consumption rose 0.3 percent in the third quarter from the second, following a 0.6 percent drop in Q2, according to the detailed GDP data released by the Federal Statistics Office this morning.

Reports that the Federal Republic of Germany is also being hit by the global financial and economic crisis and is now also in recession have caused German expectations for the economy to slide dramatically, GfK said.

The expectation indicator hit a new record low in November. In contrast, falling prices for heating oil and gasoline have somewhat eased the pessimism when it comes to income expectations and the propensity to buy. The recent collective bargaining wage agreements in the metal and electrical industry are also likely to have contributed to the fact that income sentiment has risen for the fourth time in a row.




Sharply falling energy prices also meant that the income expectations sub component continued to rise - for the fourth time in a row - and the indicator now stands at -6.9 points, year-on-year however it is still down almost 7 points.

The propensity to buy indicator also rose, more than making-up for the sharp drop in October. The rise of 11.5 points this month is almost twice as high as the drop of 5.4 points recorded in October. At present, however, the indicator still stands at -6.7 points, way below its long-term average of 0 points.

Thus the propensity to consume is still withstanding the general recessionary trend, and consumers appear to assume that they will not be particularly affected by the downturn and feel there is no special need to further restrict their willingness to buy, just at the moment at any rate.

Wednesday, November 12, 2008

Germany's Recession Becomes Official

The German economy contracted more than most analysts expected in the third quarter, entering what now appears to be its worst recession in at least 12 years as both exports and domestic spending continue to fall. German gross domestic product dropped by a seasonally adjusted 0.5 percent from the second quarter, when it fell by a revised 0.4 percent, according to data from the Federal Statistics Office earlier today (Thursday). The Germany economy last had a two quarter contracted of this magnitude back in 1996.




And all the signs are that the fourth quarter will be worse than the third one, so the situation may even surpass the 1996 recession.

``The headwinds of the financial crisis and the global economic slowdown are
blowing right in the face of the German economy,'' said Carsten Brzeski, an
economist at ING Group in Brussels. ``Even more worrying, the full impact of the
financial crisis still has to unfold. Anecdotal evidence and leading indicators
are scary.''




And the 2009 outlook promises to be even worse. Only last week, the International Monetary Fund forecast economic contractions for the U.S., Japan and the euro region next year, with Germany's economy expected to shrink by 0.8 percent.

The European Commission said on Nov. 3 that the 15-nation euro region is probably already in a recession. Just over 40 percent of German exports go to other euro-area nations. Eurostat, the European Union's statistics arm, will publish third-quarter growth data for the region tomorrow.


Quarter-on-quarter positive side of the GDP growth balance sheet came from a slight increase in the final household consumption and government expenditure of households as well as an increase inventories. Imports were up significantly (largely due to the rise in oil prices - oil peaked around $147 a barrel in July, while exports dropped, thus movements in the net trade balance had a negative impact on final GDP.

The German economy did, however, continue to create jobs, and third quarter employment - at 40.5 million persons - was up by 582,000 persons (or 1.5%) on a year earlier.

Looking forward a little into Q4, the signs, as I said, are for deterioration rather than improvement, as can be seen from the fact that (according to the PMI) German services contracted for the first time since January in October.


While the manufacturing contraction which started in August really began to pick up speed.


Tuesday, November 11, 2008

German Investor Confidence Rises Slightly In November

German investor confidence rose again slightly in November as governments and central banks stepped up efforts to fight the turmoil on financial markets. The ZEW Center for European Economic Research index of investor and analyst expectations increased to minus 53.5 from minus 63 in October. The index reached minus 63.9 in July, the lowest on record. As can be seen in the chart below, this increase is rather relative, and in historic terms investor confidence remains at pretty low levels.



Germany's benchmark DAX share index rebounded from a three- year low last month and interbank lending rates in Europe have now fallen to their lowest level since February folowing the central bank decisions to injected cash into the financial system. Also Chancellor Angela Merkel's Cabinet agreed on a stimulus package worth 50 billion euros ($64 billion) on Nov. 4.


Still, investor sentiment remained negative for a 16th month in November, suggesting pessimists outnumber optimists in the survey. The indicator's long-term average is 27.1, according to the ZEW. A gauge measuring investors' assessment of the current situation fell to minus 50.4 from minus 35.9 in October.

Thursday, November 6, 2008

Recession a Near Certainty In Germany As New Orders And Industrial Output Continue To Fall

``The worst is still to come for manufacturers,'' said Carsten Brzeski an economist at ING Group in Brussels. ``The industrialized world is heading for a recession and the German economy is in the middle of the storm.''


Industrial production in Germany declined the most in almost 14 years in September, meaning that a Q3 contraction (and hence a recession) in Europe's largest economy is now more or less a "done deal". Output was down a seasonally adjusted 3.6 percent from August, according to data from the German Economy Ministry in Berlin earlier today (Friday). Year on year earlier, production adjusted for working days fell 2.1 percent.



German companies are scaling back production as the global economy buckles under the weight of the credit crunch and the impact of higher borrowing costs, hurting export markets and causing consumers to cut back on spending as they worry about the outlook for their jobs.

The September drop in manufacturing was led by a 7.2 percent slump in the production of durable goods like washing machines, computers and televisions.




Manufacturing Orders Drop At A Record Rate


And the output for the coming months doesn't look any brighter. Manufacturing orders dropped by a record in September, led by a sharp drop in foreign demand for factory machinery, with s easonally adjusted constant price orders falling 8 percent from August, when they rose 3.5 percent. This was the largest drop since records for a reunified Germany began in 1991.

German business confidence - as measured by the ILO institute index - fell to the lowest level in more than five years in October.




And the manufacturing PMI for Germany showed contraction at the fastest pace in seven years in October.

Tuesday, November 4, 2008

German Manufacturing Contracts Sharply In October

Germany's manufacturing sector contracted in October at the fastest pace in seven years as incoming orders and output experienced their sharpest declines in more than 12 years. The headline index in the Markit Purchasing Managers Index (PMI) for Europe's biggest economy fell in October to 42.9 from 47.4 the previous month, well below the 50 mark that separates growth from contraction.




The latest figure was the worst since the month following the Sept. 11, 2001 attacks in the United States, and also below the flash PMI reading for October of 43.3.


"The data underlined the considerable extent to which the global financial crisis has affected German manufacturing, with output and new orders both falling at the steepest rates since the survey began in April 1996," Markit said. "The investment goods sector was particularly hard hit in October, as difficult economic conditions prompted some companies to cut back on capital expenditure plans.....Anecdotal evidence indicated that falling commodity prices (particularly oil) had resulted in a steep drop in input cost inflation during October,"


The Report Itself


At 42.9 in October, down from 47.4 in September, the seasonally adjusted Markit/BME Purchasing Managers' Index (PMI) - designed to give a single-figure snapshot of operating conditions in the manufacturing economy - sank to its lowest level for seven years, with all five component indexes exerting a negative influence on the headline figure.


Production levels have now fallen for three consecutive months, with the latest decline broad-based across the three market groups. Anecdotal evidence suggested that a rapid decline in new orders, combined with falling backlogs and unwanted inventory building, had led to a steep drop in output requirements. October data pointed to a survey record contraction of new business from abroad, with by far the fastest rate of decline recorded in the investment goods sector.


Survey respondents widely commented on deteriorating economic conditions in key foreign markets, particularly the UK, the US and other Eurozone countries. German manufacturers responded to weak market demand by trimming the size of their workforces for the first time since September 2005.


Job cuts were recorded in all three product sectors in October, with firms generally pointing to reductions in temporary staff at their plants.


Input cost inflation eased sharply to a five-year low in October, following falling commodity prices on world markets. This led to a further moderation in output charge inflation, which was the weakest recorded in 2008 to date.


Firms also attributed slower factory gate inflation to competitive pressures. Meanwhile, supplier performance improved at the most marked pace since December 2001, reflecting a steep contraction of demand for raw materials.

OUTPUT

Manufacturing production fell sharply in October following a rapid decline in new orders and shrinking volumes of work-in-hand. Output levels have now fallen for three consecutive months with the rate of contraction accelerating to its steepest in the twelve-and-a-half year survey history. Sector data showed particular weakness at investment goods producers, as the global economic slowdown resulted in lower capital expenditure.


NEW ORDERS


New order volumes deteriorated at a survey record rate in October, with anecdotal evidence widely suggesting that recent global financial turmoil and concern about the economic outlook had shaken market demand. Firms also commented that clients faced cash flow difficulties and associated shortages of working capital in the wake of credit market turbulence, in some cases leading to the delay or cancellation of new orders.


NEW EXPORT ORDERS


October data pointed to a steep and accelerated reduction of incoming new business from abroad. The seasonally adjusted New Export Orders Index was below the neutral 50.0 level for a fourth month running and fell to its lowest since the survey began in April 1996. There were widespread reports that the deteriorating global economic climate had led to the steep fall in new export orders, particularly in the investment goods sector.


BACKLOGS OF WORK


The volume of work-in-hand (but not yet completed) in the German manufacturing sector declined at a series record rate in October, largely reflecting a steep contraction of incoming new work. The fastest reductions of unfinished business were again in the intermediate and investment goods producing sectors.

STOCKS OF FINISHED GOODS


After adjusting for seasonal factors, the Stocks of Finished Goods Index was above the 50.0 no-change mark in October for the fourth time in the past six months. Although the rate of growth was only moderate, a number of manufacturers commented on unintentional stock accumulation in October as a result of a marked reduction in client demand.

EMPLOYMENT


Employment levels in the German manufacturing economy fell for the first time in just over three years during October, with job cuts broad-based across all three market groups. Reports from panel members indicated that personnel numbers (including temporary staff) were reduced in response to falling workloads and, in some cases, expectations of further declines in incoming new work.

OUTPUT PRICES


Average prices charged by German manufacturers increased in October, but the rate of inflation eased further from August's high and was the weakest recorded in 2008 to date. Survey respondents widely suggested that strong market competition, together with a steep moderation in input cost pressures, had resulted in slower factory gate price inflation at the start of the fourth quarter.

INPUT PRICES


The seasonally adjusted Input Prices Index fell from 66.3 to 52.1 in October, which was the largest month-on-month decline in the index since data were first collected in April 1996. Although still above the neutral 50.0 mark, the latest reading was the lowest for five years. Anecdotal evidence indicated that falling commodity prices (particularly oil) had resulted in a steep drop in input cost inflation during October.

SUPPLIERS' DELIVERY TIMES


Average vendor performance improved for a second month running in October and at the fastest pace since December 2001. A number of manufacturers indicated that a steep reduction in demand for raw materials had resulted in spare capacity at suppliers. Investment goods producers reported the most marked improvement in average vendor lead-times.

QUANTITY OF PURCHASES


Input buying declined sharply in October as firms responded to lower demand and the unfavourable economic outlook by cutting back on their purchases of raw materials. The rate of contraction accelerated markedly and was the fastest for seven years in October. Data signalled that lower levels of purchasing activity remained broad-based across all three market groups.


STOCKS OF PURCHASES


October data signalled a reduction in pre-production inventories for the first time in four months. Around 25% of survey respondents reported lower stocks of purchases at their plants, which they generally attributed to deliberate efforts to cut raw material inventories in the wake of falling production requirements.




The JP Morgan Global Manufacturing Index Plummets Too


The October contraction in Germany, while undoubtedly highly significant, is really only part of a more general global pattern. Indeed the latest JP Morgan Global PMI report really does makes for quite depressing reading.


The world manufacturing sector suffered its sharpest contraction in survey history during October, as the ongoing retrenchment of global demand and further deepening of the credit market crisis negatively impacted on the trends in output, new orders and employment. The JPMorgan Global Manufacturing PMI posted 41.0, its lowest reading since data were first compiled in January 1998 and a level below the no-change mark of 50.0 for the fifth month in a row.

Output, total new orders and new export orders all contracted at the fastest rates in the survey history in October. With the exception of India, which again bucked the global trend, all of the national manufacturing surveys posted declines in output and new orders. The impact of the downshift in global market conditions also had a far-reaching effect on international trade volumes. Although new export orders fell at a slower rate than total new business, all of the national manufacturing sectors covered by the survey (including India) saw a reduction in new export orders.



"October manufacturing PMI data reinforce the stark retrenchment that the sector is currently facing, with production, total new business and new export orders all falling at record rates. The latest Output Index reading is consistent with a fall in global IP of almost 8%. The only positive from the surveys was a decline in input prices for the first time since August 2003."
David Hensley, Director of Global Economics Coordination at JPMorgan


Economies across the Eurozone are being affected. The French manufacturing purchasing managers index was revised down to a series low 40.6 in October, down from both the 'flash' estimate of 40.8 and September's 43.0 figure, Markit Economics said in a press release issued on Monday.

Disaggregating the figures, the output component fell to an all-time low of 37.8 from September's 41.7 level, while new orders slipped all the way to a series low of 34.9 for the month, down 2.6 points from September's 37.5 level. Purchase quantities and new export orders also saw some new record lows in October, falling to 33.7 and 38.5 respectively.



In Italy manufacturing activity contracted at the fastest rate in at least 11 years in October according to the latest Markit/ADACI PMI survey out yesterday (Monday). The Markit Purchasing Managers Index fell to 39.7, its lowest since the series began in 1997, down from 44.4 in September. The Italian manufacturing PMI has now not been above the 50 mark separating growth from contraction since February and the latest data showed activity falling at an accelerating pace as demand shrank while jobs were shed at the fastest rate in the history of the survey.



Other recent indicators from Italy have also been far from encouraging, with October business confidence hit its lowest point since September 1993, when the economy seized up after Italy was rocketed out of the European Exchange Rate Mechanism a year earlier.




Spain's manufacturing sector continued to shrink at a record pace in October, with both output and new orders contracting and employers shedding jobs at a near record pace, according to the latest Markit Economics Purchasing Managers Index published yesterday (Monday). The Markit PMI for Spain dropped to 34.6 in October, the lowest reading registered by any eurozone economy since the series began in February 1998 and down from the already rapid 38.3 point contraction in September. On the PMI system any figure below 50.0 shows contraction while figures over 50.0 show growth. As we can see, according to this indicator Spanish manufacturing has now been weakening steadily since the start of 2006.



Eastern Europe


Hungary's manufacturing industry contracted sharply in October, with the PMI dropping 5.2 points to hit 44.7 in October - a historic low, and 0.8 points below the previous worst reading registered in October 1998, according to the latest data from the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM).

In Poland the ABN Amro Purchasing Managers Index fell for the sixth month running to 43.7 (down from September's 44.9) a record low and well below the neutral reading of 50, according to Markit Economics yesterday. In the Czech Republic, manufacturing output contracted for the seventh month in a row, and the index hit an all-time low of 41.2, just above the revised euro zone figure of 41.1. As the Eurozone itself contracts, these economies which are heavily dependent for exports to the zone will be buffeted, especially now that forex loans for their domestic housing markets have all but dried up.




US Manufacturing

The US manufacturing PMI dropped back to 38.9 in October from 43.5 in September, indicating a significantly faster rate of decline in manufacturing when comparing October to September. It appears that US manufacturing is experiencing significant demand destruction as a result of recent events. October's reading is the lowest level for the US PMI since September 1982 when it registered 38.8 percent. On the other hand inflationary pressures are evaporating rapidly, and the Prices Index fell to 37, the lowest level since December 2001 when it registered 33.2 percent. Export orders also contracted for the first time in 70 months.


The BRICs

China's PMI dropped to lows not previously seen in October, confirming that the economy of the so-called factory of the world is now decelerating along with everyone else. Two international surveys measuring the PMI independently corroborated the evidence of a cooling Chinese industrial economy.

According to a survey complied by securities firm CLSA, China's PMI fell to 45.2 in October, its third consecutive drop, from 47.7 in September, as new orders and exports, as well as pricing power, were squeezed by the global financial crisis.


"The very sharp fall in the October PMI confirms that China is more integrated into the global economy than ever. Chinese manufacturers are seeing their order books cut, both at home and abroad, as the world economy falls into recession," said Eric Fishwick, CLSA's head of economic research, in a report released Monday. "Costs are falling but so are output prices. The coming 12 months will be difficult ones for manufacturers, China included."


The government-backed China Federation of Logistics purchasing managers' index - published on 1 November - also showed a strong contraction, falling to 44.6 in October, the lowest level since the data began in 2005, from 51.2 in September



Russian manufacturing contracted in October at the slowest pace in over two and a half years as the global financial crisis cut demand, according to the latest reading on VTB Bank Europe's Purchasing Managers' Index, which fell to 46.4 from 49.8 in September. This was the third consecutive month in which Russian industry has been contracting.





Business conditions in the Brazilian manufacturing worsened in October for the first time since June 2006. The headline seasonally adjusted Banco Real Purchasing Managers’ Index (PMI) posted 45.7, down from 50.4 in September, pointing to a sharp contraction -the fastest in the survey history in fact. The PMI was driven down by accelerated declines in output and new orders, as well as falls in employment and stocks of purchases.

Even in India the seasonally adjusted ABN Amro India Manufacturing Purchasing Managers’ Index dropped steeply in October, falling to a record low of 52.2, down from a reading of 57.3 in September suggesting another sharp deceleration in growth, even if Indian industry managed to keep expanding. The biggest fall was in the new orders sub-index, which dropped to 54.4 in October from 62.6 in September. Perhaps the saving grace in the Indian survey is that most firms said demand remained strong in domestic markets, while it had been international orders which had waned. This can also be seen from the new export orders sub-index, which contracted to 49.7 for the first time in the history of the series. That fits in with the latest data showing that Indian year on year export growth slowed to 10.4% in September. Thus the Indian expansion is still hanging on in there, by its fingernails, but it is hanging on in.