German GDP Contracts At An Annualised 15.2% Rate In The First Three Months Of 2009

“I believe there are some grounds for being optimistic that the pace of decline in economic activity will decelerate markedly in the months ahead,” was the view being expressed by Bundesbank President Axel Weber earlier this week. And we'd better hope he's right, since with figures from the Federal Statistics Office this morning showing that Germany's recession worsened considerably in the first quarter, with the economy shrinking by 3.8 percent compared with the previous three-month period I would hate to see it accelerating. Basically a 3.8 percent contraction in three months is equivalent to a 15.2% contraction as an annualised rate, so the chances are he is right, this is a breathtaking pace, and is unlikely to be maintained. But slowing down the rate of contraction is hardly equivalent to recovery, a point weber was quick to reinforce. “However, it is certainly not advisable to be overly optimistic that the recovery process is safely on track. This will most likely be a gradual process," he added.

This is, in fact, the fourth consecutive quarter of contraction, and is the worst performance by the German economy since at least 1970 - when the German statistics office started the present time series. It is also the first time since reunification in 1990 that the German economy has experienced so many quarters of negative growth. GDP has was dragged down by the drop in export and and the consequent weakness in investment.


Year on year GDP fell by 6.7%, following a 1.7% reading in the fourth quarter of last year. Corrected for working days, GDP fell by 6.9% year on year. Last month the government revised its forecasts and is now expecting an annual contraction of 6%.



The 16-nation euro zone also slumped by a record of 2.5 percent quarter on quarter in the first there months. This is worse most analysts had been predicting as recently as a few days ago, when forecasts were pointing to a decline of around 2 percent. While Germany, Europe's largest economy saw the deepest slump, Austria was not far behind with a drop of 2.8 percent and Italy with its 2.4 percent contraction in the first quarter. Meanwhile, Europe's second largest economy, France, also saw negative growth, sliding by 1.2 percent. The 27 member European Union shrank by a quarterly 2.5 percent.

The sharpness of the German GDP contraction in the first quarter of this year is unlikely to be repeated during the rest of 2009, according to German government spokesman Thomas Steg, and given the ferocity of the downturn he is surely likely to be right. But not shrinking so fast is not the same as growing, and there is evidently a lot more pain in the works yet.

There are a number of signs of just this slowing down in the contraction already emerging. Retailer slaes in Germany fell at the slowest pace in the current 11-month sequence of decline in April, according to the Bloomberg retail PMI. Sales were down only modestly in marked contrast to the steep declines recorded at the start of the year. Month-on-month the index for Germany picked up from 44.4 in March to 48.9.




Manufacturing Contraction Eases

German manufacturing contracted for the ninth month running in April, though the pace of the downturn eased to its slowest since last November. The headline manufacturing PMI in Europe's largest economy registered 35.4, still a very low level, but nonetheless up significantly from March's reading of 32.4.

"April's survey provides hope that the German manufacturing downturn has passed its nadir, as the PMI moved further above January's record low," according to Tim Moore, economist at Markit Economics. "However, output still fell at a rate unprecedented prior to the fourth quarter of 2008, prompting firms to trim employment and inventories to the greatest extent in the survey history," he added.

New orders declined for the tenth successive month but at a much slower pace than in March, with the sub-index rising to 37.0 from 28.9 - a series record month-on-month rise. The improvement in the PMI results fits in with other recent sentiment indicator readings in German, with the Ifo institute's business climate index improving in April to its best level in five months, while the ZEW investor sentiment gauge rose to its highest level in almost two years. However, we are still a far cry from a return to output growth in Germany, with most observers anticipating a GDP contraction of between 5% and 7% for 2009, and given the export dependence we should be looking for an increase in imports in main customer economies before we start thinking about any expansion in German manufacturing output.

Industrial Output

German industrial production held more or less steady in March, for the first time in six months. Output was unchanged from February, when it dropped 3.4 percent, according to the latest data from the Economy Ministry in Berlin. Manufacturing industry continued to contract however, and was down 0.4% on the month, and by 22.8% year on year.



That being said, German industrial output levels are now very low (see chart below), and are roughly comparable with those registered in 1999/2000.




Exports Recover Slightly In March


German exports were up for the first time in six months in March, adding to signs that the pace of the economic contraction slowed slighly as we entered the spring. Exports, adjusted for working days and seasonal changes, were 0.7 percent from February, when they fell 1.3 percent, according to the latest data from the Federal Statistics Office. Year on year exports were down 15.8% following a 23.5% drop in February and a 23.2% drop in January.




German imports increased 0.8 percent in March from the previous month, when they dropped 4.8 percent. The trade surplus widened to 11.3 billion euros from 8.6 billion euros in February. The surplus in the current account, the measure of all trade including services, was 10.2 billion euros, up from 6.8 billion euros. On a seasonally adjusted basis exports were up by 0.4 billion euros from February, which means you can just barely notice the change on the chart below: ie there is still a very long way to go here.


Services Contraction Also Slows


Activity in Germany's private sector shrank for the eighth month running in April, though as elsewhere the pace of the contraction eased, in the German case to the slowest rate since last October. The services sector PMI edged up to 43.8 from 42.3 in March, while the business expectations sub index jumped to 44.4 from 39.0, and the headline composite PMI reading rose to 40.1 from 38.3 in March.

Markit reported that "Pessimism about the year ahead outlook for activity was the least marked since June 2008. This partly reflected the support given to business sentiment from the government's economic stimulus plans, as well as hopes that overall market conditions will begin to stabilise". These firmer expectations are consistent with the rise in the April Ifo reading for German corporate sentiment, which hit its strongest level in five months.

However, despite the more positive business expectations, the German government has slashed its forecast for the economy, projecting a record 6-percent contraction this year. Previously it had not shrunk by more than 1 percent in any year since the second world war.

In harmony with this more sober assessment, the sub-index on employment fell to 40.6 from 42.3 in March. "We are now seeing the labour market feel the full force of the economic downturn, with the latest wave of private sector job losses the steepest for at least 11 years," according to Tim Moore, economist at Markit Economics. "This provides advance warning that April's spike in official unemployment numbers will be repeated during the months ahead ... firms are likely to make further substantial job cuts even after the worst of the recession has passed," he added. German unemployment rose for the sixth month running in April to hit its highest level since late 2007 despite government subsidies designed to prevent mass layoffs.

Consumer Confidence Holds Steady

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.

Investor Sentiment 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.

But Unemployment Is Headed Steadily Upwards

German unemployment rose for the sixth straight month in April. The number of people out of work increased a seasonally adjusted 58,000 to 3.46 million, according to the Federal Labor Agency. The seasonally adjusted unemployment rate rose to 8.3 percent from 8.1 percent in March.

So while an increasing volume of data suggest confidence across Europe is stabilizing and the recession slowing, the continued increase in unemployment may well weaken consumer spending and help prolong the recession. And with PMI surveys showing the employment output as bleak both in the service and manufacturing industries further increases in unemployment now seem inevitable.

Job Creation Turns Negative In March


The number of those employed in Germany was down year on year in March for the first time in several years. According to provisional results from the Federal Statistical Office total March employment in Germany was 39.89 million - a decrease of 46,000 (–0.1%) on a year earlier. The last time the number of persons in employment decreased from the same month a year earlier was in February 2006.



Generally employment increases in March due to the usual spring rebound in economic activity. Over the last three years employment was up by an average 138,000 persons from February. This March, however, the increase was only 53,000 (+0.1%). The Federal Statistics Office noted that the significant extension of the short-time work probably rescued the numbers from being even worse.



Seasonally adjusted the total number of employed was 40.18 million in March, a seasonally adjusted decrease by 27,000 persons (–0.1%) on February.

While Deflation Dangers Remain

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.







Plenty More Downside To Come


Perhaps the worst casualty of all this will be German public finances. German tax revenue for 2009 is now projected to decline by more than an additional 300 billion euros as compared with previous estimates. Germany’s finance minster Peer Steinbruck is reportedly pretty depressed by the estimate, since it makes him the finance minister who presided over the highest borrowing requirement in history (as opposed to the finance minister who balanced the budget, which is what he set out to do). The economics minister, meanwhile, said that the loss in tax revenues was no reason not to cut taxes. The EU Commission now forecast Germany will have a deficit of 3.9% of GDP this year and 5.9% in 2010. As a result gross government debt is projected to climb from 65.9% of GDP in 2008 to 73.4% in 2009 and 78.7% in 2010.

The Global Services Contraction Also Stabilises in April

The contraction in global services activity also seems to be easing up, following the pattern displayed by the manufacturing sector, and the JPMorgan Global Services Business Activity Index rose for the second month running in April, registering at 43.8 its highest level since last September. It is important to keep clearly in mind, however, that the headline index remained well below the critical dividing line of 50 which separates growth from contraction, and thus we are still firmly within global recession territory. So stabilistation in the contraction is not the same thing as recovery.



The JPMorgan Global Serices Report is based on the results of surveys covering around 3,500 executives in countries which taken together account for an estimated 60% of global service sector output.

Measured overall, worldwide services activity fell for the eleventh month running. Lower levels of activity were reported across all of the nations for which April PMI data were available. Rates of decline did however ease to their weakest in the current seven month period of decline in the US, to a six-month low in the Eurozone and to their weakest for seven and eight-months respectively in Japan and the UK. Only Ireland reported a faster drop in activity than during March.


Global services employment however continued to give cause for concern and declined for the twelfth month running in April. The US saw a severe reduction, albeit at a noticeably slower pace than in March. Japan cut jobs at the weakest rate of all the nations covered. The UK, Russia and Australia reported slower declines, whereas the rate of job loss in the euro area hit a series record. Deflationary pressures were evident, and average input costs declined for the sixth successive month in April. The sharpest reductions in costs were signalled for Ireland and the US. Input prices in the Eurozone fell at the fastest pace in the series history, but slower than the global average. The UK and Russia reported higher costs in April.

The JPMorgan data is also backed by the results of the twice-yearly survey of service sector sentiment published by Markit Economics this week. The survey is carried out in the same companies as are sampled for the monthly purchasingmanagers’ indices, and showed thatcompanies in European and emerging markets services sector havenow recovered much of the confidence lost at the start of the global recession.

The majority of companies report that they expect the volume of business to improve over the coming year, with revenues growing and new orders rising. There are however important differences, since while greater optimism is evident in the Bric countries of Brazil, Russia, India and China, some European economies have notably failed to rebound, with Germany standing out as a centre of gloom at the moment, with many German companies continuing to suffer major doubts that their business outlook will improve.

Across Europe in general, 39.5 percent of service providers stated they expect their volume of business to improve over the year ahead with 21.5 percent forecasting a decline. Thus there is a positive balance of +18. This balance is far higher than the -2.9 figure recorded last October, though it is not yet at the +30 level of a year ago when few companies saw a deep recession ahead.

In the Bric countries, on the other hand, the mood is even better. The balance of Brazilian companies expecting higher volumes of business was +60.4, higher than a year ago, and the steep declines in confidence earlier witnessed in Russia and India have now been reversed. The outlier here is the Chinese service sector, which is a little less optimistic than sixmonths ago, even if the outlook is still broadly optimistic. This may well suggest that earlier Chinese reactions where rather over optimistic, since the country's export sector is still facing veryserious problems.

Eurozone


The Eurozone services PMI staged its biggest one-month rise since December 2001 as Markit unexpectedly revised up its services business activity index to 43.8 following the earlier flash reading of 43.1. Activity thus registered its slowest pace of contraction in six months in a sector which covers everything from financial services to airlines. The figure was well above the 40.9 registered in March, but still heavily in contraction territory. The rate of contraction did, however, slow in all four of the biggest euro zone countries even reaching the slowest rate of contraction in nearly a year in Spain.

The eurozone composite PMI, which includes both manufacturing and services, was also up strongly - to 41.1 from 38.3 in March. This was again the highest level since October, and suggested the rate of economic contraction in the second quarter of the year may be rather better than the 1.9 percent contraction rate expected by consensus estimates for the first three months of the year. The eurozone economy contracted at a 1.6 percent in the final months of 2008 and we may well be in for something similar in Q2.

The movement in the reading for services business expectations to 54.4 from 48.6 in March was the biggest one-month rise in this index since January 2002, and this is likely to further encourage optimists who expect the eurozone economy to start to grow again before the year is out, but really it would be very premature to draw any longer term forward looking projections at this point, especially given sensitivity in the index to seasonal factors like Easter and the weather.

Business expectations were generally up, and were the best in 15 months for Spain, and in 10 months in both Germany and France, while in Italy they hit an eight-month high. The report, however, did suggest that unemployment, which is already at 8.9 percent for the euro area as a whole (and 17.4 percent in Spain), is set to rise even further, with record rates of job cutting being reported across the entire euro area service sector.

All eurozone countries reported significant downward price pressures, and these are reflected in producer prices (which fell over 5% year on year in March, lead mainly by energy and commodities) and consumer price disinflation, where year on year price increases were only 0.6% in April, for the second month running.







Spain


Spanish service sector activity continued to decline in April although as elsewhere the rate was much slower than in previous months. The headline activity index stood at 42.5, still well below the critical 50 level indicating growth, but way above 34.1 in March and November's record low of 28.2. April's figure was in fact the highest recorded since May 2008 but nevertheless marked the 16th consecutive month of contraction as the deep recession weighed on new orders and jobs. According to Andrew Harker ,economist at Markit Economics, "Jobs continued to be lost at a fast pace, indicating that the labour market remains a key source of weakness."

The survey showed staffing levels declined in April for the 14th month running as service providers cut jobs due to lower activity and to keep costs down. Hotel and restaurant firms were the hardest hit. However despite Spain's deep and ongoing economic crisis, April's survey was marked by confidence levels not seen in 15 months. Many of those surveyed by Markit said they believed the crisis would end within a year, with two-fifths of panellists expecting activity to be higher in 12 months and just 22 percent forecasting lower activity. However, companies remained relatively cautious about short term economic prospects.

The service sector thus is showing a significantly sharper rebound from the record declines of the last few months than is to be seen in the manufacturing sector, which continued to contract at a rapid pace in April.

Prices continue to fall, and services output prices registered the third-fastest decline in the survey's history, second only to February and March this year, with those surveyed citing increased competition for new business and pressure from clients. Service providers also reported falls in input costs due to reduced labour costs and lower prices from suppliers, but, according to Markit, the decrease here was less marked than that for output prices.


Italy

Italian service sector activity contracted for the 17th consecutive month in April although at the slowest rate for six months. The Markit/ADACI Purchasing Managers' Index rose to 42.0 from 39.1 in March, but still is not that far above the record low of 37.9 recorded in February. Activity has now been stick below the 50 mark that separates growth from contraction since November 2007.

The survey showed new business shrinking for the eighteenth straight month in April, though the rate of decline eased for the second month running, while expectations of business in a year's time rose to an eight-month high. As elsewhere, while optimism is rising Markit did point to record job losses as a likely on consumer spending looking ahead, making hopes of a swift recovery extremely premature. The employment sub-index fell to 44.0 from 44.6, as firms cut jobs at a survey record rate in response to the ongoing loss of business. The survey is thus consistent with other recent indicators that have pointed to an economy still mired in the deep recession that began in spring of last year, but with some grounds for thinking that the lowest point may now have been passed. Consumer and business sentiment as measured by the ISAE institute both rose in April, and the manufacturing PMI showed activity shrinking at its slowest rate for six months after the index hit a record low in March.




Deflationary pressure remained evident with service firms cutting their prices for the seventh month running and at the fastest rate in the survey's history in response to weak demand, while input prices showed no monthly increase for the first time since the survey began. The Italian government slashed its economic forecasts last week, and now project gross domestic product to fall by 4.2 percent this year following last year's 1.0 percent decline. The International Monetary Fund is more pessimistic, forecasting a 4.4 percent fall this year and a further drop of 0.4 percent in 2010. Italy thus now possibly faces three years of economic contraction one after the other although previously the country had not posted two consecutive years of falling GDP in its entire post-war history.

Germany


Activity in Germany's private sector shrank for the eighth month running in April, though as elsewhere the pace of the contraction eased, in the German case to the slowest rate since last October. The services sector PMI edged up to 43.8 from 42.3 in March, while the business expectations sub index jumped to 44.4 from 39.0, and the headline composite PMI reading rose to 40.1 from 38.3 in March.

Markit reported that "Pessimism about the year ahead outlook for activity was the least marked since June 2008. This partly reflected the support given to business sentiment from the government's economic stimulus plans, as well as hopes that overall market conditions will begin to stabilise". These firmer expectations are consistent with the rise in the April Ifo reading for German corporate sentiment, which hit its strongest level in five months.

However, despite the more positive business expectations, the German government has slashed its forecast for the economy, projecting a record 6-percent contraction this year. Previously it had not shrunk by more than 1 percent in any year since the second world war.

In harmony with this more sober assessment, the sub-index on employment fell to 40.6 from 42.3 in March. "We are now seeing the labour market feel the full force of the economic downturn, with the latest wave of private sector job losses the steepest for at least 11 years," according to Tim Moore, economist at Markit Economics. "This provides advance warning that April's spike in official unemployment numbers will be repeated during the months ahead ... firms are likely to make further substantial job cuts even after the worst of the recession has passed," he added. German unemployment rose for the sixth month running in April to hit its highest level since late 2007 despite government subsidies designed to prevent mass layoffs.

France


The contraction also eased in the French services sector in April, this time for a second successive month in April, and the Markit/CDAF final services PMI reached its highest level in six months at 46.5, up from 43.6 in March. The composite PMI also rose to 43.8 for the month, from a revised figure of 40.2 in March.

According to Markit panellists continued to report that overall operating conditions remained unfavourable and that falling new business had again negatively impacted on activity. New orders to service providers fell for the seventh consecutive month, with hotels and restaurants bearing the brunt of the downturn as customers cut back on discretionary spending. The business expectations index on the other hand climbed to 58.3 in April from 51.9 in March, and responses were more optimistic, with Markit reporting that 37 percent of respondents expected output to be higher in twelve months' time.

In the short term, however, the picture was pretty similar to that seen elsewhere , with firms continuing to make painful adjustments to cope with a harsh economic environment, slashing prices to boost sales, and making further sweeping cuts to staffing levels. April's output prices index showed prices falling for the eighth straight month, hitting a record low of 38.1, compared with the March reading of 38.4. The services employment index rose slightly to 41.0 from 40.8 in March, but still remained close to February's survey record low of 40.6, indicating a further steep contraction in the service sector workforce, according to the Markit report.

Russia

Russia's service industries contracted at the slowest pace in six months in April as business confidence improved, according to the monthly report from VTB Capital, with the PMI coming in at 44.4, compared with 43.9 in March.

While Russian services activity fell for the seventh consecutive month, it continued to rebound from December’s record fall of 36.4. The rate of decline in new orders also eased for the third month in succession after registering a record contraction in January. Prices charged by companies declined for the first time since VTB started compiling the survey as providers competed by offering lower prices and discounts, according to the report. Input prices advanced at the slowest pace on record.

Russia’s inflation rate fell slightly in April, dropping to 13.2 percent after rising to 14 percent in March, with consumer-price growth slowing to 0.7 percent month on month, according to the Federal Statistics Service. Retail sales were down an annual 4 percent in March, the biggest decrease since September 1999, as frozen credit markets and falling incomes forced Russians to curb spending, while GDP is now thought to have fallen 9.5% year on year in the first quarter of 2009.


United States


U.S. service-producing industries contracted again in April for the seventh straight month, but again the pace was slower than in March, according to the US Institute for Supply Management.

The ISM non-manufacturing index improved to 43.7% from 40.8% in March. This was the first increase since January. The index has now been below 50% since October, and touched its lowest level of 37.4% in November. Seven of 18 industries surveyed actually showed frowth in April, including real estate, entertainment, retail, and finance. The new orders index improved to 47.0% from 38.8%.

The employment index improved to 37% from 32.3%, indicating a slackening in the pace of job destruction.

German Unemployment Rises Again In April

German unemployment rose for the sixth straight month in April. The number of people out of work increased a seasonally adjusted 58,000 to 3.46 million, according to the Federal Labor Agency. The seasonally adjusted unemployment rate rose to 8.3 percent from 8.1 percent in March.

So while an increasing volume of data suggest confidence across Europe is stabilizing and the recession slowing, the continued increase in unemployment may well weaken consumer spending and help prolong the recession. And with PMI surveys showing the employment output as bleak both in the service and manufacturing industries further increases in unemployment now seem inevitable.

Job Creation Turns Negative In March


The number of those employed in Germany was down year on year in March for the first time in several years. According to provisional results from the Federal Statistical Office total March employment in Germany was 39.89 million - a decrease of 46,000 (–0.1%) on a year earlier. The last time the number of persons in employment decreased from the same month a year earlier was in February 2006.



Generally employment increases in March due to the usual spring rebound in economic activity. Over the last three years employment was up by an average 138,000 persons from February. This March, however, the increase was only 53,000 (+0.1%). The Federal Statistics Office noted that the significant extension of the short-time work probably rescued the numbers from being even worse.



Seasonally adjusted the total number of employed was 40.18 million in March, a seasonally adjusted decrease by 27,000 persons (–0.1%) on February.

In Labour Market Terms The Worst Is Far From Over

The German economy is still in a serious rcession, with exportslikely to be down by 23 percent in 2009 according to the country’s leading economic institutes. As such it is clear that the contraction “is consuming the usual spring rebound in the labor market,” as Labor Agency President Frank-Juergen Weise put it last week. German unemployment has now beenn increasing since last November after falling steadily for more than three years. The economy is expected to lose some 50,000 jobs per month on average this year, according to the most recent government estimates, and this despite programmes which allow companies to keep workers on their payrolls when orders are slack. Some 24,000 companies with 650,000 workers signed up to the programme in Marcg, around 7,000 companies more than in February, according to the Labor Ministry data.

The German government has so far implemented two economic stimulus programs, amounting between them to €80 billion, or 3.2% of GDP, of which 1% of GDP has its effect in 2009. At first glance, this is indeed less than the American program, which totals 6.2% of GDP, of which 2% will be spent in 2009, but the built-in flexibility of German'd extensive social-welfare system also needs to be taken into account.

The German state recorded a budget deficit of just 0.1% of GDP in 2008, but this, according to a recent OECD forecast, will soar to 4.5% of GDP in 2009. Thus, the economic stimulus provided by the German state budget will amount to something like 4.4% of GDP in 2009.

According to the OECD, the annualized flow of German goods exports from January 2008 to January 2009 declined by $173 billion more than the corresponding flow of imports fell, which means that Germany’s annualized trade surplus fell by the same amount. This is the strongest decline in net foreign demand facing a single country, or, equivalently, the strongest increase in a country’s net demand for foreign goods. Japan, for example, has confronted only a $157 billion decline in its annualized trade balance, while China’s annualized trade surplus increased by $249 billion. In other words, from January 2008 to January 2009, China withdrew $249 billion in annualized demand from the world economy, whereas Germany soaked up a $173 billion net decline in external demand and Japan a $157 billion one.