Germany faces an economic struggle with stagflation on the menu

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by Shaun Richards

At a time when interest-rate increases are all over the news with the US (0.5%) and India (0.4%) yesterday and the UK expected today, it is instructive to look at somewhere that is not seeing this,. This is the Euro area where the ECB has a deposit rate of -0.5% and this morning its largest economy has reported this.

WIESBADEN – According to preliminary information from the Federal Statistical Office (Destatis), real (price-adjusted) new orders in the manufacturing sector fell by a seasonally and calendar-adjusted 4.7% in March 2022 compared to February 2022. Without taking major orders into account, the decline was 2.2%. Compared to March 2021, the order intake was 3.1% lower after calendar adjustments.

With Germany being famous for still being a production economy this is a particularly important development. The cause is shown below.

The month-on-month decrease is mainly due to foreign orders: Their volume fell by 6.7% in March 2022 compared to February 2022. Incoming orders from outside the euro zone fell by 13.2%. In contrast, incoming orders from the eurozone rose by 5.6%. Domestic orders fell by 1.8%.

We see this affecting another German strength which is its trade position. This is no surprise because the two are intimately related. The statisticians go on to blame the war in Ukraine.

In the case of manufacturers of capital goods, incoming orders in March 2022 were 8.3% below the level of the previous month. This decline is also a sign of growing reluctance to invest in a politically and economically tense situation.

There was also a clear signal of the problems created by the supply-chain crisis because if you think orders were bad enough then sales did this.

According to preliminary data, real turnover in the manufacturing sector was a seasonally and calendar adjusted 5.9% lower in March 2022 than in February 2022. Compared to the same month of March 2021, it was a calendar adjusted 6.2% lower.

Which was on top of this in February.

After the revision of the preliminary results, sales for February 2022 fell by 2.2% compared to January 2022 (preliminary value: -1.4%).

This returns us to an issue we have been looking at since 2018, or more specifically since Germany revised its numbers for the early part of 2018. The sales (turnover) index is now at 94.5 where 2015 = 100

Markit PMIs

Even this seems to have picked up that the times they are a changing for manufacturing in Germany.

The survey’s output index is now in contraction territory
for the first time since the initial COVID shutdowns in the
first half of 2020, with a similar situation for new orders
hinting that this not just a supply problem but also
evidence of slowing demand for goods.

Unusually for Markit they were very downbeat.

It’s early days yet, but it’s already looking like
manufacturing will be a drag on the economy in the
second quarter, and the prospect of more lockdowns in
China and any escalation of the energy crisis would only
serve to increase this risk

Although they had returned to normal behaviour yesterday.

Activity levels across the German service sector continued
to recover strongly during April thanks to a sustained upturn in demand.

If you are wondering from where? So am I.

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After the above it is no surprise to see this for trade in March.

WIESBADEN – In March 2022, German exports were down by 3.3% and imports were up by 3.4% on a calendar and seasonally adjusted basis compared with February 2022.

Some of it is due to Russia although as you can see the sanctions are a one-way game.

Compared with February 2022, exports to the Russian Federation decreased by 62.3% to 0.9 billion euros in March 2022 ……..Imports from Russia declined by 2.4% to 3.6 billion euros in the same period.

Care is needed as the position was previously so strong Germany still has a trade surplus.

The foreign trade balance showed a surplus of 3.2 billion euros in March 2022.

But it was in double-digits in terms of billions of Euros both in the previous month and March 2021.

As it is getting publicity here are the March figures with the UK.

exports to the United Kingdom fell by 3.9% to 5.5 billion euros…..Imports from the United Kingdom increased by 40.8% to 3.7 billion euros in the same period.


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We can now switch to monetary policy and let us start with a German policymaker Isabel Schnabel. This was her on Wednesday.

Apparently it is not the policies which are the problem.

Above all, that shows that we still need to do better at communicating

Suddenly she cannot avoid reality.

Inflation is extremely high, and that hits people on low incomes especially hard.

As to interest-rates the reply to others increasing them now is to claim some date in the future in a Definitely Maybe style.

From today’s perspective, a rate increase in July is possible in my view. We of course have to wait and see how the data evolve up to the time of the decision. The first interest rate hike will in any case not take place until after the end of net asset purchases; we have committed to that.

The next bit is very revealing before switching to an outright lie.

The lowering of interest rates below zero was uncharted territory, making it essential to move cautiously. This reasoning does not apply when moving in the opposite direction.

As they have not raised interest-rates for more than a decade the chutzpah is almost off the scale.

This morning board member Panetta put his cards on the table at the beginning

The European economy is de facto stagnating. Growth in the first quarter was 0.2%, and would have essentially been zero without what may have partly been one-off spikes in growth in certain countries. The major economies are suffering – GDP growth has slowed in Spain, halted in France and contracted in Italy.

The mention of Italy must be particularly painful as of course the Prime Minister Mario Draghi was previously President of the ECB. He is not keen on Germany either.

In Germany growth momentum is low and has been weakening since the end of February, which is the point when everything changed.

He expects worse to come.

We are talking about potentially large effects: the reduction in euro area income due to increased import prices amounts to 3.5% of GDP, or about €450 billion.

So any interest-rate rise will have to wait.

The evolution of GDP in the first quarter reflects only partially the impact of the war. We have to wait for the second quarter figures to get a clear picture. Our monetary policy is data driven, and we cannot make decisions before we have seen the figures.

As the figures are published after the July meeting he wants to wait until September at best.

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He wants to stop inflation.

We can and must prevent high inflation from becoming entrenched in the economy, which would lead to price increases that we saw as temporary becoming a structural and permanent phenomenon.

As long as it does not cost anything.

We cannot tame inflation on our own without causing high costs for the economy.

In fact can’t somebody else do it?

 We need to act on multiple fronts, not just through monetary policy.

He seems to be following The Beatles.

>I need somebody
(Help) not just anybody
(Help) you know I need someone, help


If we return to the interest-rate situation we see that the ECB has failed to act as inflation has risen but wants us to believe it will act in the future. The catch is that economies are weakening as board member Panetta admitted earlier today and we have seen from the statistics on manufacturing and trade. So by July or later he and presumably others will be making the case that the ECB cannot raise interest-rates due to economic weakness. The German Bundesbank put its thoughts on economic problems in its latest Monthly Report.

To wit, an increase in commodity prices, which would indirectly erode household incomes, would weaken growth considerably. Moreover, foreign demand, and thus German exports, would decline significantly. The third factor they list is heightened uncertainty, which would be a drag on business investment and private consumption

For now we see a situation that not long ago would be unthinkable in Germany as an interest-rate of -0.5% faces this.

Harmonised index of consumer prices, April 2022:
+7.8% on the same month a year earlier (provisional)
+0.7% on the previous month (provisional)


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