Germany is facing the credit crunch era version of stagflation

by Shaun Richards

Some days a topic appears that has become an economic theme plus links with the discussions of earlier in the week and today is such a day. Since late summer last year we have began observing some backfires in the engine of the German economy and that turned into a second half of 2018 that saw economic output as measured by Gross Domestic Product actually fall.  This meant that the 2.2% economic growth of 2016 and 2017 decelerated to 1.4% in 2018. Apparently that is enough to turn Germans to drink.

WIESBADEN – As reported by the Federal Statistical Office, the beer producing and storing establishments in Germany sold 2.0 billion litres of beer in the first quarter of 2019. That was an increase of 2.4% from the corresponding period of the previous year.

However that report from earlier failed to provide enough support for the retail sales numbers.

Retail turnover, March 2019
-0.2% on the previous month (in real terms, calendar and seasonally adjusted, provisional)
-0.5% on the previous month (in nominal terms, calendar and seasonally adjusted, provisional)
-2.1% on the same month a year earlier (in real terms, provisional)
-1.7% on the same month a year earlier (in nominal terms, provisional)

If we concentrate on the real or volume figures we see the retail sales fell by 0.5% on the February numbers and were 2.1% on last year. This would be a troubling development if it persisted because one of the issues of the pre credit crunch era was the German export surplus which we know has if anything grown since. There has been a lot of establishment rhetoric about it but it has been hot air as we sing along with Bob Seeger and the Silver Bullet Band.

Cause you’re still the same
You’re still the same
Moving game to game
Some things never change
You’re still the same.

A proposed win-win situation out of this would be for German domestic consumption to rise and thereby boost imports to reduce the export surplus. This would be a win-win because the imports would be others exports and might lead to a virtuous circle where they could afford more German exports. But the March signal from retail sales is the consumption is not only not booming but maybe falling.

This is a change on what we had seen so far in 2019 and as ever in the retail sales series we wonder about how reliable the seasonal adjustment has been.

The Easter holiday situation had a negative impact on March 2019 sales when compared to March 2018.


This is an area where the news has progressively gone from bad to worse. This mornings Markit business survey continued the theme.

Latest PMI® data from IHS Markit and BME revealed a further marked contraction of Germany’s manufacturing sector at the start of the second quarter, albeit with the rates of decline in output and new orders easing slightly since March.

Before this phase the phrase “marked contraction” was something definitely not associated with German manufacturing, and especially its up until now very successful car industry.

Behind the decrease in output in April was a seventh straight monthly reduction in new orders. Despite easing slightly since March, the rate of decline remained sharp and quicker than at any other point over the past ten years. This was also the case for new export orders. Where firms reported a decrease in inflows of new work, this was often linked to a slowdown in the automotive industry.

So we see that the automotive slow down is rippling though other parts of industry. Earlier this month Germany’s statisticians focused in on this.

In the course of 2018, however, the production of motor vehicles, trailers and semi-trailers decreased markedly….. the Federal Statistical Office (Destatis) reports that production in the second half of 2018 was a calendar and seasonally adjusted 7.1% lower than in the first half of the year.

They went onto point out that it was 4.7% of the German economy in 2016 and employed 880.000 people directly.

If we look ahead then the outlook also looks none too bright.

Finally, April’s survey showed manufacturers growing
gloomier about the outlook for output over the next 12
months. The degree of pessimism was the greatest seen
since November 2012.

Even this was happening.

another modest decrease in employment

However this just feels like stating the obvious.

Capacity pressures meanwhile continued to dissipate.


This from Tuesday added a little fuel to the fire.

WIESBADEN – The inflation rate in Germany as measured by the consumer price index is expected to be 2.0% in April 2019. Based on the results available so far, the Federal Statistical Office (Destatis) also reports that the consumer prices are expected to increase by 1.0% on March 2019.

Actually the Euro standard HICP measure or what we in the UK call CPI rose to an annual rate of increase of 2.1%. As to what drove it we see that the annual rate of energy costs has risen from 2.3% in January to 4.6% in March but a larger impact has come from services inflation rising from 1.4% to 2.1% because it is 53% of the index ( These breakdowns are from the German CPI).

As we so often find rental inflation at 1.4% pulls the number lower as it has been 1.4% every month in 2019 so far. Also it is time for my regular reminder that owner-occupied housing costs are ignored.

Given the tight market situation in 2018, prices in Germany as a whole advanced at nearly the same pace as in the preceding years, with house and apartment prices up by an average 8% in the 126 cities. ( Deutsche Bank )

They expect 7.9% this year which will have central bankers rubbing their hands at the wealth effects, after all if you ignore the inflation here it just disappears doesn’t it?

Principally because of low-interest rates, aggregate private household wealth in the entire cycle since 2009 has risen successively by roughly EUR 3,800 bn or over 40%,
according to the Federal Statistical Office, with property asset growth largely paralleling that of financial assets. ( Deutsche Bank)

Also I note that they think that rental inflation for new properties was 5% last year and 4.5% this which begs a question of the official data.


Whilst comparisons with the stagflation of the 1970s leave us well short of the absolute level of inflation it is also true that wage growth is much lower. The Ivory Towers will need a very cloudy day to avoid spotting that inflation has risen when according to their models it should be falling. So not much growth and some inflation makes us mull that temporarily at least Germany is something of a sick man of Europe.

The irony is that as I reported on Tuesday the pick-up in narrow money growth means that the Euro area has better economic prospects than it did. So other nations look like they will do better than Germany for a while and Spain for example already has been, Thus they may support it and stop things getting as bad as some think. But let me leave you with some manufacturing PMI numbers that this time last year would have been considered as “unpossible”.

Greece 56.6,  UK 53.1,  Germany 44.4


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