What is happening to the economy of Germany?

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by Shaun Richards

As both the largest economy and indeed the bellweather for the Euro area Germany is of obvious importance. This morning has brought us more up to date in the state of play. Firstly the statistics office has continued to update its data on the quarter just gone.

WIESBADEN – The gross domestic product (GDP) rose by 8.5% in the third quarter of 2020 compared with the second quarter of 2020 after adjustment for price, seasonal and calendar variations. Thus, the German economy could offset a large part of the massive decline in the gross domestic product recorded in the second quarter of 2020 due to the coronavirus pandemic. However, the price-, seasonally and calendar-adjusted GDP was still 4.0% lower in the third quarter of 2020 thanin the fourth quarter of 2019, that is the quarter before the global coronavirus crisis.

That is an improvement of the order of 0.3% on what was previously thought. This does in fact give us a partial V-Shape as you can see below.

In the circumstances that is a reasonably good performance and the statistics office puts it like this.

For the whole EU, Eurostat released a preliminary result of -4.3% for the third quarter of 2020. The United States also recorded a strong decline of their gross domestic product (-2.9%, converted figure) compared with the third quarter of 2019. In contrast, year-on-year GDP growth as published by the People’s Republic of China amounted to 4.9% in the third quarter.

There is another context which is that the German economy had previously been struggling. This began with the 0.2% decline at the opening of 2018 which was claimed to be part of the “Euro Boom”. Economic growth was a mere 1.3% in 2018 which then slowed to 0.6% in 2019 so we can see that there were pre pandemic issues.

The Breakdown

I thought that I would switch to the labour market for this and an ongoing consequence for other areas.

The labour volume of the overall economy, which is the total number of hours worked by all persons in employment, declined even more sharply by 4.0% over the same period.

I am using a measure of underemployment as the international definition of unemployment has simply not worked. Next we can switch to wages.

According to first provisional calculations, the compensation of employees was down by just 0.7% year on year, while property and entrepreneurial income fell sharply by 7.8%. On average, gross wages and salaries per employee fell by 0.4%, while net wages and salaries rose slightly by 0.5%.

So we see a familiar situation of income being supported by the furlough scheme although outside it there has been quite a hit. But as there have been restrictions on spending we see a surge in saving.

According to provisional calculations, the savings ratio was 13.5% in the third quarter of 2020.

We wait to see what will be the full economic impact of a surge in involuntary saving but here is the flip side.

Household final consumption expenditure at current prices, however, showed a decrease of 4.0%.

What about now?

This morning has brought the latest update from the Ifo Institute.

Munich, November 24, 2020 – Sentiment among German managers has deteriorated. The ifo Business Climate
Index fell from 92.5 points in October to 90.7 points in November. The drop was due above all to companies’
considerably more pessimistic expectations. Their assessments of the current situation were also a little worse.
Business uncertainty has risen. The second wave of coronavirus has interrupted Germany’s economic recovery.

It is the services sector which has taken the brunt of this.

In the service sector, the Business Climate Index dropped noticeably. For the first time since June, it is back in
negative territory. Assessments of the current situation are much less positive than they were. Moreover,
substantially more companies are pessimistic about the coming months. The indicators for hotels and
hospitality absolutely nosedived.

The one area which has managed some growth is manufacturing.

This month’s bright spot is manufacturing. The business climate improved here, with companies assessing their
current situation as markedly better. Incoming orders rose, albeit more slowly than last month. However,
expectations for the coming months turned notably less optimistic.

Although as you can see the new restrictions due to Covid-19 have affected expectations. But the picture for the overall economy was that things continued to improve in October but have now reversed. So the vaccine news has not impacted expectations there yet and the V-Shape above will see at least a kink. The general view is similar to that given yesterday by the Matkit business survey.

New lockdown measures to curb the spread of
coronavirus disease 2019 (COVID-19) led to an
accelerated decline in services activity across
Germany in November, latest ‘flash’ PMI®
from IHS Markit showed. However, the country’s
manufacturing sector continued to exhibit strong
growth, helping to support overall economic activity.

They did however hint that the Far East is helping German manufacturing.

which the survey shows is
benefitting for growing sales to Asia in particular.

Financial Conditions

These remain extraordinarily easy. There is the -0.5% deposit rate of the ECB with the -1% interest-rate for the banks. Then there is the enormous amount of bond buying which under the original programme ( PSPP) totaled some 562 billion Euros at the end of October. It is a sign of the times that there is another buying programme as well as the ECB tries to muddy the waters and as of the end of September it had bought another 125 billion.

Today Germany issues a two-year bond and it will be paid to do so as the yield is -0.75% as I type this. Furthermore this yield has been negative for over 5 years now as that state of play looks ever more permanent. Indeed with the thirty-year at -0.16% the whole yield curve is negative.

Switching to the Euro exchange-rate things are not so bright. If we take a long-term context Germany joined to get a weaker exchange-rate. However in recent times it has been rising and the effective index is at 121.5 or 21% higher than when the Euro began. Whilst November has seen a dip the index started 2020 at 115.

Comment

The context is that at the end of the third quarter the German economy had grown by 2.7% compared to the 2015 benchmark. But the news restrictions mean that it has “And it’s gone” to quote South Park. There are vaccine hopes for 2021 now but 2020 looks like being a year to forget.

This brings us to the role of the ECB which is already heavily deployed. Can it respond to the latest dip? Not in any timely way as we note the lags in the system. Also for Germany there is not a lot more that can be done in terms of interest-rates or bond yields as all are heavily negative. The wheels of fiscal policy are being oiled by this as well. Looking at it like that only leaves us with the Euro exchange-rate. Can ECB President Lagarde fire a “bazooka” at that? As I pointed out yesterday looking at the UK with all central banks easing that is easier to say than do.

Meanwhile returning to the world of finance there is this.

FRANKFURT (Reuters) – Germany’s blue-chip DAX index will expand to 40 from the current 30 companies with tougher membership criteria, exchange operator Deutsche Boerse said on Tuesday.

In general a good idea as it is too narrow an index for an economy the size of Germany, especially in the light of this.

The most recent departure was payments company Wirecard, which in a blow to Germany’s capital markets, filed for insolvency just two years after its promotion to the index. The payments company owed creditors billions in what auditor EY described as a sophisticated global fraud.

The perils of indexation?

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