This morning we have an example of news which in itself deserves to grab some headlines but also has quite a few consequences. So let me had you over to the German statistics office.
WIESBADEN – The gross domestic product (GDP) fell by 0.4% in the fourth quarter of 2022 compared to the third quarter of 2022 – adjusted for price, seasonal and calendar effects. As reported by the Federal Statistical Office (Destatis), GDP was 0.2 percentage points lower than reported in the rapid release of January 30, 2023 .
As the 0.1% economic growth for the Euro area depending on the extraordinary numbers from Ireland ( it was very marginally negative otherwise) this begs questions for it too. If we look for the causes then the German statistics office has given an implicit nod to my analysis on the weak path for real wages as back on the 9th of November last year I pointed out this.
Returning to the countries we do have then for real wage growth we have Germany ( -3.5%), France ( -2.1%), Ireland ( -4.9%), Italy ( -8.6%), Netherlands ( -12.8%), and Spain ( -3.8%)
Such analysis would suggest a weaker path for consumption and this morning we have been told this.
The continued strong price increases and the ongoing energy crisis weighed on the German economy at the end of the year. This was particularly noticeable in private consumer spending, which fell by 1.0% in the fourth quarter of 2022 (price, seasonally and calendar adjusted).
This is a large fall and is making some look back.
Massive drop in domestic demand in Q4 in Germany. Last time we got such bad readings:
– Lockdowns
– Great Financial Crisis ( @MacroAlf )
Some of it was due to the end of government subsidies.
After the discontinuation of benefits such as fuel discounts and 9-euro tickets, consumers spent less on consumption in the 4th quarter of 2022 than in the 3rd quarter of 2022.
Also investment was hit which is another factor we have been expecting ( as with present energy prices what is the point?).
In addition, less was invested than in the previous quarter: construction investments increased as in the price, seasonally and calendar adjusted (-2.9%) in the two previous quarters. Investments in equipment – i.e. primarily in machinery, equipment and vehicles – also fell significantly at the end of the year (-3.6%).
This is quite a potential reversal for a manufacturing economy like Germany. Whilst the trade figures did boost GDP there were issues there too.
In the 4th quarter of 2022, a total of 1.0% fewer goods and services were exported than in the 3rd quarter of 2022, adjusted for price, seasonal and calendar effects. Imports fell even more sharply at -1.3%
As you can see exports were in line with the lower output figures and imports with consumption. Also we do get some extra detail.
In addition to the tense international situation with supply chains still disrupted, this was mainly due to the high energy prices, which were reflected in weaker trade in chemical products, among other things……..Due to sharp declines in production in energy-intensive sectors such as the manufacture of chemical products and metal production and processing, gross value added in manufacturing fell by 0.6% in the fourth quarter of 2022,
The fall in manufacturing is a particular issue for Germany. But moving to a more services based economy had issues too.
Against the background of the high inflation rates, the gross value added in the other service providers (-6.8%) and in the retail, transport and hospitality sectors (-2.9%) was significantly lower than in the previous quarter.
Although the ECB will be relieved that it did not extend to the real estate and housing sectors.
There was only slight growth in the areas of information and communication, real estate and housing as well as corporate service providers.
Perspective
This means that 2022 saw quite a change as the post pandemic boom collided with inflation.
In the first three quarters of last year, gross domestic product increased (+0.8%, +0.1% and +0.5%)
Essentially the economic push ended in the spring as we now wonder what the downturn will amount to? We now know that things have flatlined since the second quarter with GDP then 107.46 as opposed to 107.50 in the fourth quarter,
Looking Ahead
There was some further ominous news this morning and it comes from an area which has featured already.
“Europe’s competitiveness is increasingly suffering from overregulation, slow and bureaucratic permitting processes, and in particular, high costs for most production input factors,” BASF Chief Executive Officer Martin Brudermueller said in a statement. ( Bloomberg)
So what are they doing about it?
The chemical giant will close a number of factories, including two ammonia plants and related fertilizer facilities, resulting in 700 job cuts at its main Ludwigshafen plant in Germany, the company said Friday. ( Bloomberg)
This adds to the news from January
Dow Inc. plans to cut about 2,000 jobs as the chemical maker seeks $1 billion in savings and confronts a flareup in energy costs that followed Russia’s invasion of Ukraine.
The company said it will shut down certain operations, “particularly in Europe,” in response to the challenges. ( Bloomberg )
This leaves us with quite a mess as described below.
European gas prices have dropped 85% from a record in August, indicating that the crisis is easing But that’s due in part to companies, like BASF and Dow, shutting factories. Analysts warn this could have a long lasting impact on Europe’s economy. ( @SStapzynski )
It seems hard to believe that some on social media have been cheerleading for the falls in gas consumption in Europe ignoring the obvious demand and supply ( in related sectors) destruction it has caused. Although inadvertently @LionHirth was sort of right.
This is truly remarkable
The ECB
The news above provides a problem for the ECB and not least for its President Christine Lagarde. Only on Wednesday I noted her saying this.
ECB’S PRESIDENT LAGARDE: IN 2023, THERE WILL BE NO EUROZONE COUNTRIES IN RECESSION.
That could yet be filed with her claim last year that inflation would only be a “hump”
This morning you might think that the head of Germany’s central bank would be worried about economic growth but apparently nor.
Feb 24 (Reuters) – The European Central Bank may still need to raise interest rates significantly beyond March as inflation, particularly underlying price growth, remains too high, Bundesbank President Joachim Nagel said on Friday.
In essence he has chosen to reinforce what we looked at on Wednesday.
“That’s why I’m not ruling out that further interest rate hikes, significant interest rate hikes, beyond March, may be necessary.”
The ECB has already promised to raise rates by 50 basis points to 3% in March and markets now price another 75 basis points of moves before the end of the summer.
Comment
We now see a situation where Germany has not only reversed back to pre pandemic levels (107.50 for GDP) but also has a shrinking economy. Yet we see that the ECB plans to continue raising interest-rates after economic data which in the past would have suggested a cut. That is an irony after last year when it ignored rising inflation and called it a “hump” when interest-rate increases would have helped. Now the past rises will be feeding in and find additions whilst the economy is weak and inflation looks to be on a weaker path.
Remember too that the ECB wants to restrict wage growth as consumption is taking rather a dive.
Just as we were beginning to hope things were turning for the better we get a reminder of the problems the present energy crisis has provided for an economy like Germany. A bit like The Beatles lyrics below where the optimism of Paul McCartney is not matched by John Lennon.
I’ve got to admit it’s getting better (better)A little better all the time (it can’t get no worse)