After last night’s rather damp squib from the US Federal Reserve ( they can expand QE within meetings) the Euro area takes center stage today. This is because the leader of its economic pack has brought us up to date on its economy.
WIESBADEN – The gross domestic product (GDP) in the 2nd quarter 2020 compared to the 1st quarter 2020 – adjusted by price, season and calendar – by 10.1%. This was the sharpest decline since the beginning of quarterly GDP calculations for Germany in 1970. It was even more pronounced than during the financial market and economic crisis (-4.7% in the first quarter of 2009).
So in broad terms we have seen a move double that of the credit crunch which was considered to be severe at the time. The economy had also contracted in the first quarter of this year which we can pick up via the annual comparison.
Economic output also fell year-on-year: GDP in the second quarter of 2020 was 11.7% lower than in the previous year after adjustment for prices (including calendar adjusted). Here, too, there had not been such a sharp decline even in the years of the financial market and economic crisis of 2008/2009: the strongest decline to date was recorded in the second quarter of 2009 at -7.9% compared to the same quarter of the previous year.
So the worst annual comparison of the modern era although by not as large an amount.
We do not get an enormous amount of detail at this preliminary stage but there is some.
As the Federal Statistical Office (Destatis) further reports, both exports and imports of goods and services collapsed massively in the second quarter of 2020, as did private consumer spending and investments in equipment. The state, however, increased its consumer spending during the crisis.
Just like in the film Airplane they chose a bad time to do this…
Beginning with the second quarter of 2020, the Federal Statistical Office published GDP for the first time 30 days after the end of the quarter, around two weeks earlier than before. The fact that the results are more up-to-date requires more estimates than was the case after 45 days.
Although not a complete disaster as they would have been mostly guessing anyway. One matter of note is that 2015 was better than previously though and 2017 worse both by 0.3%. That is not good news for the ECB and the “Euro Boom” in response to its policies.
Unemployment
There has been bad but not unexpected news from the Federal Employment Agency as well this morning.
Unemployment rose by 2.0% compared to the previous month and by 27.9% year-on-year to 2.9 million. Underemployment without short-time work increased by 1.3% compared to the previous month and by 14.6% compared to the previous month. It is 3.7 million The unemployment rate is 6.3%, the underemployment rate is 7.9%.
Now things get a little more awkward as the statistics office has reported this also.
According to the results of the labor force survey, the number of unemployed was 1.97 million in June 2020. That was 39,000 people or 2.1% more than in the previous month of May. Compared to June 2019, the number of unemployed rose by 653,000 (+ 49.2%). The unemployment rate was 4.5% in June 2020.
What we are comparing is registered unemployment or if you prefer those receiving unemployment benefits with those officially counted as unemployed. Whilst we have a difference in timing ( July and then June) the gap is far wider than the change. The International Labour Organisation has some work to do I think…..
Being Paid To Borrow
Regular readers will be aware that this has essentially been the state of play in Germany for some time now. In terms of the benchmark ten-year yield this started in the spring of last year, but the five-year has been negative for nearly the last five years. That trend has recently been picking up again with the ten-year going below -0.5% this week. With the thirty-year at -0.12% then at whatever maturity Germany is paid to borrow,
This represents yet another defeat for the bond vigilantes because even Germany’s fiscal position will take a pounding from the economic decline combined with much higher public spending. But these days a weaker economy tends to lead to even lower bond yields due to expectations of more central bank buying of them.
ECB Monthly Bulletin
After the German numbers above we can only say yes to this.
While incoming economic data, particularly survey results, show initial signs of a recovery, they still point to a historic contraction in euro area output in the second quarter of 2020.
The problem is getting any sort of idea of how quickly things are picking back up. The ECB seems to be looking for clues.
Both the Economic Sentiment Indicator and the PMI display a broad-based rebound across both countries and economic sectors. This pick-up in economic activity is also confirmed by high-frequency indicators such as electricity consumption.
Meanwhile it continues to pump it all up.
The Governing Council will continue its purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,350 billion…………Net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion, together with the purchases under the additional €120 billion temporary envelope until the end of the year……..The Governing Council will also continue to provide ample liquidity through its
refinancing operations. In particular, the latest operation in the third series of targeted
longer-term refinancing operations (TLTRO III) has registered a very high take-up of
funds, supporting bank lending to firms and households.
As to the last bit I can only say indeed! After all who would not want money given to you at -1%?
Comment
We now begin to have more of an idea about how much the economy of Germany has shrunk. Also this is not as some are presenting it because the economy changed gear in 2018 and the trade war of last year applied the brakes. Of course neither were on anything like the scale we have noted today. Whilst the numbers are only a broad brush they are a similar decline to Austria ( -10.7%) which gives things a little more credibility. Markets were a little caught out with both the Euro and the Dax falling as well as bond yields.
Looking ahead we can expect a bounce back in July but how much? The Markit PMI surveys seem to have lost their way as what does this mean?
The recovery in the German economy remained on
track in July, according to the latest ‘flash’ PMI® data
from IHS Markit
Which track?
“July’s PMI registered firmly in growth territory and
well above expectations, in a clear sign that
business conditions are improving across Germany
as activity and demand recover. Furthermore, for
an economy that is steered so much by exports, it
was encouraging to see manufacturers reporting a
notable upturn in sales abroad.”
I am not sure that anyone backing their views with actual trades are convinced by this. Of course things will have picked up as the lockdown ended but there will now be worries about this,
Germany records the highest number of new coronavirus cases in about six weeks ( Bloomberg)
So the recovery seems set to have ebbs and flows. Accordingly I have no idea how places can predict such strong bounce backs in economic activity in 2021 as we still are very unsure about 2020. I wish anyone ill with this virus a speedy recovery but I suspect that economies will take quite some time.