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.

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.

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.