Germany Continues its Slide

These days there is little post christmas cheer from Germany. The more data we receive the more the double-dip looks like a done deal. Today's new unemployment figures revealthat seasonally adjusted unemployment rose 28,000 to 4.19m in December, a fresh four-year high. The number of Germans looking for work at the end of last year rose by 200,000 on an unadjusted basis to 4.22m, the strongest monthly increase since 1997. At the same time gloomy trading statements from two of Germany's leading retailers today confirmed fears that the sector, which registered its biggest contraction in five decades last year, could be heading for an equally difficult time in 2003.The 2002 turnover figures from Metro, the country's largest retail group, and Douglas, a perfume, jewellery, and book seller, also added to anecdotal evidence of poor Christmas sales after official statistics this week showed a steep drop in November consumption.

The Nuremberg-based Federal Labour Office said on Thursday the average number of jobless was 4.06m, 220,000 higher than in 2001 and marking the highest annual increase for five years. The annual unemployment rate in 2001 was 9.8 per cent.The broad difference between Germany's east and west persisted last year with unemployment more than twice as high in the former communist east. Baden-Württemberg in Germany's south boasted the lowest unemployment rate at 5.4 per cent while Saxony-Anhalt in the east topped the list with 19.6 per cent. The Labour Office said the increase meant it would need an extra E2bn from the federal government to pay the higher number of people receiving unemployment benefit. Rainer Schmidt, labour market expert at a prominent Kiel-based economic think-tank, said: "We cannot see light at the end of the tunnel yet." He expects another rise in unemployment in January to an unadjusted "minimum of 4.5m people, probably slightly more," depending on the weather.
Source: Financial Times
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"There are serious indications that 2003 will be yet another difficult year for the retail trade," Henning Kreke, chief executive, said, declining to give sales targets for the current year. Analysts said the 2.6 per cent drop in German sales in 2002 betrayed a passable performance at Douglas-branded perfume and cosmetics shops but a sharp fall in sales at its Christ jewellery stores.German retailers have been plagued by Europe's lowest margins for decades. But consumption saw its sharpest drop since the war in 2002 as consumers have grown concerned about unemployment, the country's faltering economy, a perceived rise in inflation, and talks of tax increases.In this context, analysts have praised Metro's expansion of its wholesale Metro and Makro stores beyond Germany over the past few years and the repositioning of its high-end Saturn electronics store as a quasi-discounter through its popular "thrift is cool" campaign launched late last year.
Source: Financial Times
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Rinban Rising?

Recent currency market fluctuations, combined with a consensus dollar overvaluation is leading many commentators to frantically search for a currency which might have the possibility of supporting a sustained rise. Clearly this is not the case with the Yen, since almost all proposals for tackling Japanese deflation are accompanied with a recommendation to drop the Yen. At present the Euro is rising steadily, but those famous 'fundamentals' seem to offer little support for this with Germany on the point of a double-dip recession, and with the distinct possibility of following Japan into a deflation trap. Hence the 'experts' are searching frantically for an alternative, and according to this piece from the Financial Times they may have found a candidate: China. There are rumours that there will be a move a the next G7 meeting to begin to pressure China to come off the dollar peg. If this is true it is not a well-advised proposal. China is still economically in its infancy, is carrying much of the load of world economic growth, and is suffering its own deflation and internal dislocation following the restructuring of the state sector. Any proposal to raise the Chinese Yuan would be a result of economic weaknesss elsewhere, not strength from China, not yet. The solution to US, Japanese and European growth problems does not revolve around making life more difficult for the one part of the world economy that is actually working. As I said, not yet anyway.

Speculation has been mounting in recent days that the G7 meeting scheduled for the end of the month will urge China to allow an appreciation of the renminbi. Japan, in particular, has long claimed that China is exporting deflation. On the surface, the rumours look credible. The US is now running a larger trade deficit with China than with Japan - $9.5bn compared with $6.5bn in October. The People's Bank of China has estimated that 75 per cent of manufactured goods produced by China are in oversupply, leading to a build-up of inventories. But, according to Marc Chandler, chief currency strategist at HSBC in New York, there is unlikely to be any new developments on the renminbi at the next G7 meeting.

"It is simply that the G7 members do not tend to spend much time with issues over which they have little power," he said. "And it will be almost impossible to persuade China of the wisdom of revaluing its currency." Although official Chinese growth rates were generally treated with scepticism by analysts, he said, there was no denying that the economy had flourished under the fixed rate. A revaluation would reduce China's competitive edge, aiding its regional rival Japan. In addition, a more flexible currency regime would demand a relaxation of restrictions on capital flows. This, said Mr Chandler, would also threaten the position of Chinese companies by forcing them to compete more actively for funds from domestic investors. "Some think that bad debts are around 30 per cent of GDP, which may be even worse than the problem in Japan," he said. "Relaxing capital controls would be exposing Chinese companies to competition before they are ready." By cutting import prices, an appreciation of the renminbi would also exacerbate China's own deflation - which has been running at between 1 and 2 per cent during the past three years."The stable renminbi is in China's interests," Mr Chandler said.
Source: Financial Times
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Eyes on the American Consumer

With the Japanese consumer on long-term siesta, the German consumer in serious retreat, and the Chinese consumer yet to arrive, all eyes are turning nervously in the direction of the American consumer. After eighteen months of heavy lifting are they getting tired. Certainly the confidence index readings seem to suggest this, so do the initial reports on December retail sales. Now we learn that even Las Vegas is begining to feel the pinch, and that less short term debt is being contracted. Things don't look too promising right now.

Consumer credit outstanding posted an unexpected decline in November, the Federal Reserve said on Wednesday, its first drop in more than four years. The central bank said consumer debt fell by $2.2 billion in November after rising a revised $1.6 billion in October. It was the first time since January 1998 that credit had declined and the biggest drop since October 1991.

The report could increase worries that the consumer spending, the main driver of the U.S. economy, may be faltering. Household expenditures make up about two-thirds of economic activity. Analysts believe the economy grew at between 1 percent and 2 percent in the final three months of 2002, well below its limits and spurring the Bush administration to put forward an economic growth package on Tuesday. "Many Americans live in constant and increasing personal debt, with credit card bills so heavy they often cannot pay much more than the monthly minimum," Bush said in unveiling his package of personal and business tax breaks at a speech in Chicago on Tuesday. (You bet George! E.H.)
Source: Yahoo News
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Getting High on the Euro

The Euro continues its rise. For the prestige of the ECB and the standing of the EU I suppose this is a good sign. But since this rise is more a 'dollar fall' and since what the economists love to call the 'fundamentals' don't seem to justify it at all, permit me to have my doubts. With low uptake of new tecnologies, sluggish momentum from the US and downright deflation in Japan, and ageing populations perhaps it will be more like a reamke of an old Eastwood movie: Hang-em High 2.

Clearly the rise in the Euro will have a deflationary impact on the European economy generally (remember the Chinese Yuan is pegged to the dollar), exports will decline and imports rise, and with deflation and not inflation the buzzword, all this doesn't augur too well. As the article blogged below points out, Europe as a whole is twice as dependent on exports as the US, with Germany (the EU motor?) especially vulnerable:

The strengthening euro is beginning to pinch European exporters, and it is increasing expectations that the European Central Bank will cut interest rates this year. In recent weeks, international companies ranging from beer brewers to electronics manufacturers have warned that the appreciating currency is chipping away at foreign sales and profits. All other factors equal, a rising euro makes European goods more expensive overseas, and therefore less competitive, or yields exporters smaller earnings when they convert foreign profits into euros. The cries are loudest in Germany and Ireland, the two euro-zone countries most reliant on exports. Last week, the euro briefly rose above $1.05 to a three-year high. It traded at $1.0417 late Friday in New York, making for a 16% rise over the past year against the dollar and a 6% rise against a basket of major currencies used by the ECB.

The common currency was intended partly to help shield the 12-nation euro bloc from currency shocks by creating a large, unified economy. But Europe is still more sensitive to currency fluctuations than is the U.S., because Europe's economy is nearly twice as reliant on trade. The ECB estimates that a 5% increase in the euro sustained for a year can knock as much as 0.9 percentage point off annual growth, seven times the impact a similar rise in the dollar would have on the U.S. For Germany, the euro zone's largest economy, sales to the U.S. dropped 15% in euro terms during the first 10 months of 2002, compared with a 9% increase in 2001 and double-digit rises during the previous three years. By value, 40% of Germany's manufactured output is exported. One firm feeling the pinch is Siemens AG. The electronics firm generates about 80% of its sales outside Germany. In the year ended Sept. 30, sales slipped 3% to 84 billion euros and new orders declined 7% to 86.2 billion euros -- partly because of currency moves.
Source: Yahoo News
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