The outlook for the economy of Germany has plenty of dark clouds

by Shaun Richards

Sometimes it is hard not to have a wry smile at the way events are reported. Especially as in this instance it has been a success for my style of analysis. If we take a look at the fastFT service we were told this yesterday.

German industrial production unexpectedly drops in November.

My immediate thought was as the German economy contracted by 0.2% in the third quarter we should not be surprised by declines. Fascinatingly the Financial Times went to the people who have not been expecting this for an analysis of the issue.

German data released over the past two days have painted a glum picture for how Europe’s biggest economy performed during the latter part of 2018. fastFT rounds up what economists and analysts have said about what is happening. Anxieties over global trade wars and political uncertainty in the eurozone have taken their toll, and Europe’s powerhouse is showing signs of fatigue. Questions of whether a recession is looming have also been raised, while many economists remain cautiously optimistic in their prognosis.

If we now switch to what we have been looking at I wrote this on December 7th about the situation.

If we look at the broad sweep Germany has responded to the Euro area monetary slow down as we would have expected. What is less clear is what happens next? This quarter has not so far show the bounce back you might expect except in one area.

So not only had there been an expected weakening of the economy but there had been at that point no clear sign of the promised bounce back. What we know in addition now is this which was released on January 3rd.

  • Annual growth rate of broad monetary aggregate M3 decreased to 3.7% in November 2018 from 3.9% in October
  • Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 6.7% in November, compared with 6.8% in October

So another decline and if we look for a trend we would expect Euro area growth to continue to be weak and this time around that is being led by Germany. The link between monetary data and the economy is not precise enough for us to say Germany is in a recession but we can expect weak growth at best heading into the early months of 2019. The FT does to be fair give us a brief mention of the monetary data from Oxford Economics.

lending growth remaining robust

The problem with that which as it happens repeats the argument of Mario Draghi of the ECB is that it is a lagging indicator in my opinion as banks respond to the better economic news from 2017.

As these matters can be heated let me make it quite clear that I wish Germany no ill in fact quite the reverse but the money supply data has been clear and has worked so far. Frankly the way it is still being widely ignored suggests it is likely to continue to work.

This week’s data

Trade

This morning’s release started in conventional fashion as we got the opportunity to observe yet another trade surplus for Germany.

 Germany exported goods to the value of 116.3 billion euros and imported goods to the value of 95.7 billion euros in November 2018………The foreign trade balance showed a surplus of 20.5 billion euros in November 2018. In November 2017, the surplus amounted to 23.8 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 19.0 billion euros in November 2018.

In world terms an annual decline in Germany’s surplus is a good thing as it was one of the imbalances which set the ground for the credit crunch. But if we switch to looking at this on a monthly basis this leapt off the page at me about imports.

-1.6% on the previous month (calendar and seasonally adjusted)

A fall in imports is a sign of a weak economy as for example we saw substantial falls in Greece back in the day. There are caveats to this of which the biggest is that monthly trade data is inaccurate and erratic but such as the numbers are they post another warning. The other side of the balance sheet was more conventional in that with current trade issues one might expect this.

also reports that German exports in November 2018 remained nearly unchanged on November 2017.

Let us move on by noting that due to the way that Gross Domestic Product or GDP is calculated lower imports in isolation provide a boost before a “surprise” fall later as it filters through other parts.

Production

If we step back to Monday there was some troubling news on this front.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in November 2018 a seasonally and calendar adjusted 1.0% on the previous month.

So not much sign of an improvement and it was hardly reassuring that geographically the issue was concentrated in the Euro area.

Domestic orders increased by 2.4% and foreign orders decreased by 3.2% in November 2018 on the previous month. New orders from the euro area were down 11.6%, new orders from other countries increased 2.3% compared to October 2018.

Then on Tuesday we got disappointing actual production numbers.

In November 2018, production in industry was down by 1.9% from the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). The revised figure shows a decrease of 0.8% (primary -0.5%) from October 2018.

So November has quite a fall and this was compared to an October number which had been revised lower. This meant that the annual picture looked really poor.

-4.7% on the same month a year earlier (price and calendar adjusted)

Business surveys

At then end of last week we were told this by the Markit PMI ( Purchasing Manager’s Index) at the end of last week.

December saw the Composite Output Index fall for the fourth month running to 51.6, down from 52.3 in
November and its lowest reading since June 2013.
The latest slowdown was led by the service sector, as the rate of manufacturing output growth strengthened for the first time in five months, albeit picking up only slightly and staying below that of services business activity.

The problem for Markit is that rather than leading events they are lagging them as they are recording declines after the economic contraction in the third quarter. If we took them literally then the economy would shrink by even more this quarter! Anyway they no seem to be on the case of the motor industry. From yesterday.

Latest data indicated a worsening downturn in the European autos sector at the end of 2018. Production of automobiles & parts fell for the third month running, and at the fastest rate since March 2013. New orders fell sharply, with new export business (including intra-European trade) declining at the fastest rate in six years.

Comment

The German economy found itself surrounded by dark clouds as 2018 developed and as I am typing this we have seen more worrying signs. From @YuanTalks.

It’s the FIRST YEARLY DROP in at least 20 years. Passenger car sales slumped 19% y/y in Dec 2018 to 2.26 mln vehicles.

Over 2018 as a whole car sales fell by 6% so we can see the issue is accelerating and there are obvious implications for German manufacturers. It has been accompanied by another generic sign of possible world economic weakness from @LiveSquawk.

Exclusive: Apple Cuts iPhone Production Plan By 10% – Nikkei 

Suddenly there is a lot of concern over a German recession or as it is being described a technical recession. In case you were wondering that means a recession that is within the error range of the data which actually covers most of them! Because of these errors it is hard to say whether the German economy grew or contracted at the end of last year, as for example wage growth should support consumption. But what we can say is that the broad sweep from it to the like;y trend for the early part of 2019 is weak. Perhaps some growth but not much after all even 0.2% growth in the final quarter would mean flat growth for the second half of the year.

For those who think ECB policy is set for Germany this poses quite a problem as it has ended its monthly QE purchases just as things have deteriorated in a shocking sense of timing. But to my mind just as bad is the issue that my “junkie culture” theme that growth was dependent on the stimulus also gets a tick including something of a slap on the back from Mario Draghi who seems to have come round to at least part of my point of view.

I’ll be briefer than I would like to be, but certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

According to Handelsblatt every little helps.

Germany has saved €368 billion in interest costs on its debt thanks to record low interest rates since the financial crisis in 2008, according to Bundesbank calculations. That’s more than 10% of annual GDP.

 

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