Is The German Economy Resisting?

Germany's economy continues to show signs of bucking what in many ways could be thought of as a global slowdown trend. But just how real are the possibilities that Germany can escape from the problems that seem to be affecting many of the world's largest economies? Let's take a look at some of the most recent data.

Unemployment

German unemployment fell for yet another month in March, reaching its lowest level since August 1992 as worldwide demand for cars, sports shoes and factory machinery prompted companies to add staff to fuel the export machine. The German jobless rate, adjusted for seasonal changes, declined to 7.8 percent from 8 percent in February, the Federal Labor Agency in Nuremberg said today.




The adjusted number of people without work fell by 55,000 to 3.29 million, the labor agency said. In western Germany, the number of people out of work declined by a seasonally adjusted 36,000 to 2.15 million in March, while the number in eastern Germany dropped by 19,000 to 1.14 million. According to the latest ILO comparable data Germany's jobless rate was 7.6 percent in January, compared with 7.8 percent in France, 3.8 percent in Japan and 4.9 percent in the U.S. The OECD average for the month was 5.5 percent.





German unemployment has now fallen for 26 months in a row. As we can see in the chart above unemployment has been trending continuously down, while the rate of new jobs creation seems to have stalled slightly between September and December, and then picked up again in January and February (remember these are year on year numbers, so largely deviod of seasonal fluctuation) and this is pretty consistent with a picture we are receiving from other quarters. The German economy is being powered by its export sector, and by the capital investment neeeded to keep this firing on all six ylinders. As if to confirm what I am arguing, German plant and machinery orders rose 10 percent in February from a year earlier, driven by domestic sales, which jumped 12 percent, according to the VDMA machine makers association in a press release earlier this week. Foreign sales also remained strong, gaining 9 percent, but it is the domestic demand which is important here, since all those factories producing all those exports need to be continually re-equipped.


Retail Sales


Retail sales in Germany, on the other hand, had their biggest month on month fall in almost a year in February as faster inflation, and not especially strong increases in average earnings, eroded consumer spending power. Sales, adjusted for inflation and seasonal swings, fell 1.6 percent from January, the Federal Statistics Office in Wiesbaden said today. That's the biggest month on month drop since May 2007.

According to provisional results of the Federal Statistical Office, in February 2008 turnover in the German retail trade was in money terms 2.4% larger and in real inflation adjusted terms 0.3% smaller than in February 2007. There was even one extra shopping day in February 2008 - 25 - as compared with February 2007 - 24.




Taking the two months together and comparing them with January-February 2007 retail turnover was up in nominal terms by 2.4% and exactly equal in inflation adjusted real terms to the turnover achieved in the first two months of 2007. If we look at the chart for the seasonally adjusted monthly index we can see that the general trend since March/April of 2007 has been steadily downwards, which is just another way of saying that the German economy is now almost completely dependent on exports (and the capital investment necessary to be able to produce them) for obtaining economic growth. So it seems a little hopeless to imagine that at this point a recovery in domestic consumer demand is going to sustain the economy should exports start to flag.




German policy makers who may have been relying on consumers to help fuel growth as a U.S.-led global economic slowdown may ultimately threaten exports, will find these results very disappointing. While consumer and business confidence all rose last month and as falling unemployment should in theory help support consumption, inflation running close to the fastest pace in 12 years is surely starting to impact on consumer spending power.

German consumer prices, as measured by the harmonized European Union method, rose 3.2 percent in March. European inflation hit 3.5 percent in March, the highest level in almost 16 years, the European Union's statistics office in Luxembourg said earlier this week.



If we look at the retail sales Purchasing Managers Index chart (the PMI gives us a slightly different, and more "as it happens", reading on retail sales), we should note that even though retail sales have been hardly spectacular in the first three months of this year, they are also hardly collapsing, and the March reading suggests they will hold up at least one more month. This reading is consistent with a lot of other data we are getting at the moment, and does suggest that even though consumption will not drive growth, neither is it going to "crash" it, and it at least mirrors the underlying "push" which is still being sustained in the exports and the industrial production areas.



Sales of food, drink and tobacco fell 4.1 percent from a year earlier, sales at supermarkets and department stores declined 4 percent and specialty food-store sales declined 5.9 percent. In February, non-food retail sales gained 2.8 percent from a year earlier, with the biggest increase -- 7.4 percent -- in sales of clothes, shoes, textiles and leather goods in specialty stores. Sales of appliances and furniture rose 2.8 percent, the statistics office said.

On the other hand inflation is becoming a real problem. GfK AG, the Nuremberg-based consumer research company, said March 27 that if inflation doesn't abate, German consumer-spending growth may fall short of evn its 1.5 percent 2008 growth forecast.

``Should the inflation rate remain significantly above 2 percent this year and therefore stay higher than initially assumed, then private consumption will only increase by up to 1 percent this year,''

Even so, GFKs consumer confidence index rose for the first time in three months in April as continuing employemnt growth appeared to havve boosted households' willingness to spend. Germans' income expectations and a gauge measuring their optimism about the economic outlook rose, according to the index.

Manufacturing Output

Germany's manufacturing sector expanded in March at its fastest pace in seven months, driven by output growth and a record increase in employment, the NTC/BME manufacturing Purchasing Managers' index showed on Tuesday. The survey also pointed to a rise in orders at manufacturing firms, with demand from abroad proving resilient despite strength in the euro, which makes exporters' goods more expensive outside the single currency zone. The NTC/BME Purchasing Managers' index (PMI), based on a survey of around 400 firms, rose to 55.1 from 54.3 in February -- reaching its highest level since August. A reading above 50 indicates expansion.



The March reading surpassed an NTC/BME "flash estimate" issued on March 20, which saw the index at 54.9.

An index on employment rose to 56.5 from 55.3 in February, hitting its highest level since the survey began in April 1996. German unemployment hit a post-war high above 5 million in March 2005 but has since fallen steadily, helped by solid economic growth and hiring by companies to meet firm demand. Joblessness fell for the 23rd straight month in February.

The NTC index on new orders accelerated to 54.9 from 52.8 in February. Another on output eased to 54.7 from 56.0 but remained well above the 50 threshold between expansion and contraction. The strong PMI reading fits in well with the recent reports from the Ifo and ZEW economic institutes showing German corporate morale rose in March, suggesting the economy is proving resistant in the short term to problems in the United States.


Conclusion, It's The Exports to Eastern Europe Silly


The manufacturing, and employment and retail sales PMIs for March thus add to a number of other signs which we have been noting on this blog that the German economy is currently resisting the slowdown in global growth, the record oil price and the recent euro highs against the dollar. One very large part of the explanation - as explained in detail in this post - may very well be the rapid rate of expansion which still continues in many East European economies and Russia, which are very very important to German export performance (and especially now that previously strong customers like Italy and Spain are gradually sliding away and over the horizon). So how long will the German resistance continue? Just as long as the strong expansion in the Czech Republic, Poland and Russia continues I would say. Just that long and no longer. This is what export dependence means.

German Exports and German Growth Resilience in January and February 2008

Evidence is mounting that the German economy has found its second wind, and at this point in time is enduring the global downturn rather better than might have been initially expected. Perhaps the first clear indication that the progress of the German economy had stabilised came with the February reading on the EU Business Sentiment Index, which although it remained at rather lower levels than had been registered during most of 2006 and 2007 was at 103.7 still up slightly on the January reading of 103.1. That is to say there was some evidence that the rot had stopped, at least temporarily.



This confidence reading has been followed by a stabilisation and uptick in the German indicators like the IFO and Zew indexes, the GFK consumer confidence index, the February manufacturing and services purchasing managers indexes, and the performance in retail sales. All point more or less in the same direction. So what is causing this.

Export Lead


Well the German economy is certainly export and not domestic consumption lead, so perhaps our instincts should tell us that export performance would be the best place to look to try and get a handle on what has been happening, and it seems that if we do this our intuition will not fail us since according to provisional data from the Federal Statistical Office, a decisive improvement can be noted in January's export performance over the December one, and indeed January marks the first month of improvement after several months of weakening on the export front.

In fact in January Germany exported goods to the value of EUR 84.4 billion and imported goods to a value of EUR 67.3 billion. German exports were thus up 9% year on year and imports up 10.2% over January 2007. When allowing for calendar and seasonal factors, German exports increased by 3.8% and imports by 4.2% over December 2007.

What we can see in the above chart is that German exports staged something of a recovery in January. This recovery is consistent with data readings we have been getting on other fronts, like the IFO and ZEW indexes, and the manufacturing and services PMIs.

This is not by any means a 100% turn round for the German economy, but it does mean that a pretty effective short term brake has been applied to the downward movement in economic activity, and it now remains to be seen how this pans out over the next two to three months.

What we can see is that this rebound is unlikely to be permanent, but for the time being is cushioning the German economy to some extent.

Germany's foreign trade balance showed a surplus of EUR 17.1 billion in January 2008 up from the EUR 16.4 billion achieved in January 2007.

In January 2008 Germany exported EUR 54.3 billion of goods to EU Member States, while it received EUR 43.1 billion worth of imports from EU countries. Compared with January 2007, dispatches to and arrivals from the EU countries increased by 7.7% and 11.2%, respectively. Goods to the value of EUR 36.2 billion (+6.3%) went to euro area countries in January 2008, while imports from those countries were EUR 29.9 billion (+10.0%).

Goods to the value of EUR 18.1 billion (+10.5%) went to EU countries not belonging to the euro area in January 2008, while goods arriving from those countries had a value of EUR 13.2 billion (+13.9%).

Germany exported goods to the value of EUR 30.0 billion to and imported goods to the value of EUR 24.2 billion from countries outside the European Union (third countries) in January 2008. Compared with January 2007, exports to third countries were up by 11.5% and imports from those countries by 8.5%.

Exports 2007


In 2007 Germany imported goods to a value of 772,511 million euros as compared with 733,994 million euros in 2006, an increase of 5.2%. In 2007 Germany exported goods to a value of 969,049 million euros as compared with 893,042 million euros in 2006, an increase of 8.5%. In 2007 the goods trade surplus was 196,538 million euros as compared with 159,048 million euros in 2006. This means there was an increase of 23.6% in the trade surplus between 2006 and 2007, and it is the trade surplus that to a large extent drives German GDP growth.


About three quarters of exports of goods “made in Germany” were shipped to European countries. 65% of all goods were delivered to the member states of the European Union. The second important sales market for German goods in 2007 was Asia with a share of about 11%, followed by America, with a share of approximately 10%. Africa and Australia / Oceania only accounted for small percentages of German exports (2% and 1%, respectively).

The majority of German imports also came from Europe (72%), followed by Asia (16%) and America (9%). Goods from Africa and Australia / Oceania played just a subordinate role in imports too (2% and 0.3%, respectively).

In 2007 – as in the year before –the top country of destination for German exports was France followed by the United States and the United Kingdom. Germany exported goods worth 93.9 billion euro to France (9.7% of total German exports), 73.4 billion euro to the United States (7.6%) and 71.0 billion euro to the United Kingdom (7.3%).

Most of the goods imported to Germany also originated from France. The countries ranking second and third were the Netherlands and China. Germany imported goods worth 64.9 billion euro from France (8.4% of total German imports), 64.3 billion euro from the Netherlands (8.3%) and 54.6 billion euro from China (7.1%).



Below you will find lists of German exports by countries for 2006 and 2007. Of interest are, for example, the numbers for China (up from 27,520.6 million euro in 2006 to 29,922.7 million euro in 2007, that is an incease of only 2,402.1 million Euro, or 8.7%) and the Czech Republic (up from 22,255.3 million euro in 2006 to 26,026.6 million euro in 2007, or an incease of 3,771.3 million Euro, about double the Chinese increase at 16.9%). The United States is down from 78,011.4 million euro in 2006 to 73,356.0 million euro in 2007, that is decrease of 4,655.4 million Euro or 6%. Poland is up from 28,820,4 million euro in 2006 to 36,083.2 million euro in 2007, that is an increase of 7,262.8 million Euro or 25.2%. Spain is up from 42,159.2 million euro in 2006 to 48,157.7 million euro in 2007, that is an increase of 5,998.5 million Euro or 14.2%. The Russian Fderation is up from 23,371.8 million euro in 2006 to 28,185.2 million euro in 2007, that is an increase of 4,813.4 million Euro or 20.6%.




Whole Year 2007 German Exports by Country in Million Euro


France 93,860.6
United States 73,356.0
United Kingdom 70,998.8
Italy 65,148.0
Netherlands 62,373.5
Austria 52,762.5
Belgium 51,407.0
Spain 48,157.7
Switzerland 36,355.3
Poland 36,083.2
China, People's Republic of 29,922.7
Russian Federation 28,185.2
Czech Republik 26,026.6
Sweden 21,677.6
Hungary 17,304.9
Denmark 15,358.2
Turkey 15,082.7
Japan 13,075.2
Finland 10,291.4
Korea, Republic of 8,733.0
Slovakia 8,550.3


Whole Year 2006 German Exports by Country in Million Euro

France 86,093.0
United States 78,011.4
United Kingdom 65,340.5
Italy 59,971.4
Netherlands 55,876.5
Belgium 49,249.2
Austria 48,921.1
Spain 42,159.2
Switzerland 34,725.7
Poland 28,820.4
China, People's Republic of 27,520.6
Russian Federation 23,371.8
Czech Republik 22,255.3
Sweden 18,881.2
Hungary 15,870.8
Turkey 14,389.9
Denmark 14,020.4
Japan 13,860.9
Finland 9,299.6
Korea, Republic of 8,476.2
Slovakia 7,621.3
Portugal 7,460.5

In Conclusion


It is now quite evident that some slight easing in the downward on the German growth process is now taking place, the recent data are too consistent to ignore on this front. The IFO reading was not as weak as might have been expected, the GFK consumer confidence reading remained stationary, unemployment continued to fall on a seasonally adjusted basis,and the January retail sales data and February PMI reading indicate an expansion in German retail sales for the first time in several months.

Of course how long this process will last, and how important the turnround will prove to be, is very hard to say at this point. Looking at the general economic environment I wouldn't be betting on any kind of very strong upswing, but the numbers are interesting, and I wouldn't be surprised at all to see the recovery in the January export situation being carried over into February. An Eastern Europe effect perhaps? Certainly several economies are still accelerating there, almost to overheating, and the strong growth rates in German exports to Poland, the Czech Republic and Russia are unmistakable signs of something.



We can see some slight consumption effect in provisional results released by the Federal Statistical Office turnover in the German retail trade for January, since sales were up by 2.7% in nominal terms and 0.6% in real terms over January 2007. When adjusted for calendar and seasonal variations the January turnover was in 1.9% higher in nominal terms and 1.6% in real terms over December.



Now this is not an earth shattering change, but it is significant. If we add to these results the latest reading on the Bloomberg retail sales purchasing managers index, which rose to 52.1 in Feb from 44.2 in Jan (according to data released yesterday by NTC economics), then obviously we can see that the sales climate has improved somewhat. In fact this was the first time in almost a year that German retailers anticipated that future sales performance would exceed plans, while the retail sales rose for the first time in five months. The last time the retail PMI registered an expansion was in September 2007.



As I say at the start of this post, it is very hard to decide how to read all of this, but I imagine everything will become clearer as the days pass.

Latvia's Economy Enters Recession in Q4 2007

Well the great Baltic economy overheating debate is now gradually drawing to a close as it becomes increasingly clear in each of the three cases (Latvia, Lithuania and Estonia) which way the cookie is eventually going to crumble. Today it is Latvia's turn as we now have a more complete set of data on Q4 2007 Latvia GDP from Latvijas Statistika (following the preliminary release covered here), and the most important detail is that they have revised their year-on-year growth estimate down to 8%. Unfortunately in the actual release the statistical office don't enter into any detail about the quarter itself, and in particular don't give a number for quarter on quarter growth. So, since the number looked very small and I was curious to know what the actualy quarterly performance was I went and checked in the database, and here is a summary of what I found.



Basically if you look at the last two bars on the above chart you should be able to just make out that - at constant prices - Latvian GDP actually declined between Q3 and Q4 2007, down to 2.222 billion Lat from 2.227 billion lat in Q3 2007. That is a DROP of 0.23% (my own calculations) which might seem small but we should bear in mind that in Q3 the Latvian economy was still growing at a quartery rate of 2.8% (or around 11% annualised) so movin from this to an annualised negative growth rate of around 1% is not at all small beer, and constitutes very rapid deceleration indeed. So while the actually data point may not seem like much, the implications are really quite profound. Technically we could consider a recession as two quarters (back to back) of negative growth. Well, we just had one of them it seems, and with all the dials continuing to show negative we are surely now in the third month of the second one. Which means, on my call, that Latvia is fully in recession at this point, and the only question really left is how long and how deep the recession is going to be.

Of course you can get some idea of the speed of the slowdown from looking at the year on year growth chart, but this doesn't really give us enough detail at this particular point in time to get hold of the actual process taking place.


To answer one small potential quibble in advance, the Latvian Statistics Office do not seem to publish seasonally adjusted quarterly data, so I am working from original series numbers (corrected for constant prices). However, if we look at the cahrt from GDP on a quarterly basis since 2000, we can see that the seasonal variance is not large, and that in no previous Q4 so far this century has GDP actually fallen, and if there has been any notable seasonal impact it is in a slight slowing in Q1, when bad weather will presumeably have affected construction activity, and retail sales may be slow in the post xmas period. The current slowdown in construction has little to do with seasonal factors, and everything to do with the cutting off of the credit supply by the Scandinavian banks back in the late spring.



Moving on to look now at the Q4 "uses of GDP" side, the only area which showed positive movement was in fact the much berated area of government spending, which I think basically vindicates both me and the Latvian government for saying that during the last quarter of 2007 it was ridiculous to continue talking about trying to run a fiscal surplus since the economy had already turned (six months earlier, and then previous to that was a very different matter). If we start by looking in detail at private consumption for Q4 we will find that this was down from 1.637 billion Lats in Q3 to 1.612 billion in Q4 (or by -1.55%).



On the other hand gross capital formation was down from 920 million Lat in Q3 to 873,2 million in Q4 (a reduction of 4.69% - all numbers at constant prices).



External trade was also less of a drag in Q4, although the deficit was still substantial, dropping from 582.5 million Lat in Q3 to 561.4 million in Q4 (a reduction of 3.6%) .



As I say the only really strong point in all of this was government consumption, which increased from 303.5 million Lat in 343.3 million Lat in Q4 (or up by a hefty 13.1%). Since the Latvian economy now needs a very heavy and rapid blood transfusion if it is not to swoon completely, more power to the elbow of government spending in the short term should be the watchword from where I am sitting. The economy now urgently needs some sort of platform placing firmly underneath it, since otherwise with this rate of contraction the danger is that as the inflation peters out it will be followed by sharp and severe deflation.



So as a say at the start of this post, the great "hard landing - soft landing" debate is now effectively over, and a hard landing it is (although I haven't seen the touch judge raising his red flag yet). The only real outstanding issues now are how long the Lat peg can hold, and what to do now to drag the economy out of the mire into which it is steadily sinking.

France Retail PMI and Consumer Confidence February 2008

Well, this week from France we have two different leading indicators - consumer confidence and retail sales - and they seem to be moving in different directions, which is rather strange to say the least.

Perhaps the clearest indication that the French economy may not be holding up as well as it was is to be found in the latest reading for France on the EU Economic Sentiment Indicator. France reported a deterioration in confidence, down to 105.2 in February from 107.0 in January.




Consumer confidence in France also fell to a record low in February as the fastest inflation in 12 years squeezed purchasing power. A gauge of consumer sentiment fell to minus 35, the lowest since the index was introduced in 1987, from minus 34 in January, according to the latest data from Insee, the Paris-based national statistics office.



More than 80 percent of French people said they saw their purchasing power decline in the last 12 months, according to a poll by Paris-based Ifop institute. That is up from 65 percent in November and from 59 percent in January 2007.


The sub component measuring consumers' sentiment about their current standard of living declined to minus 68 from minus 65, the INSEE report showed, while the sub-index evaluating the outlook for living standards rose to minus 42 from minus 44. The personal financial situations component was unchanged at minus 25. The report showed more people may delay big purchases as that component fell to minus 26 from minus 24.

People are evidently worried about rising prices, and President Nicolas Sarkozy, who made purchasing power the centerpiece of his presidential campaign, is facing his lowest popularity rating since he took office in May.

Consumer prices climbed by an annual 3.2 percent in January, according to the European Union-harmonized index, up from 2.8 percent in December and the fastest since the statistics office began reporting the data in 1996.



Food costs jumped 4.2 percent in January, compared with a 3.1 percent increase in the prior month. Meanwhile, oil prices surged to a record above $102 a barrel last week as the dollar fell below $1.50 against the euro for the first time.

Obviously all of this is causing quite a fuss in France, and a study by the Institut National de la Consommation published last week showed French supermarket food prices are rising faster than raw-material costs. The Paris-based consumer group found the biggest price jumps were for baby milk, pasta, ham and yogurt, which climbed between 40 percent and 48 percent in the six weeks to Jan. 9, based on a survey of 1,055 food prices on the Web sites of five of France's biggest chains.

That this uptick in inflation is bound to give all policymakers a major headache was perhaps underlined by the recent admission by French President Nicolas Sarkozy, who has been one of Jean Claude Trichet's strongest critics, that accelerating inflation in France "worries me". So it should do, and especially since it is seriously going to restrict the hands of policymakers over at the ECB.

Prime Minister Francois Fillon said during the week that the French government is investigating food-price increases and suppliers' profit margins, but Insee's consumer report showed consumers are not particularly reassured by government promises or by the firm ECB stance at this point, since they anticipate that inflation may continue to accelerate with the component for price expectations dropping to minus 23 from minus 11.

To some extent these concerns by French consumers are also borne out by the latest data for French producer prices also released by INSEE this week. French producer prices rose 0.5% month-on-month in January, up from a revised 0.1% rise in December. Producer price inflation for December was revised down from 0.2% initially estimated. Producer prices rose more than the 0.4% increase expected for January. On an annual basis, producer prices climbed 4.9% in January, while economists were looking for 4.8% growth.

Industrial producer prices, excluding energy and agri food, were up 0.5%, following a 0.1% fall in December. The annual growth in the index stood at 1.6%. Industrial import prices gained 0.4%, after recording 0.4% fall in December. Over the last year, import prices rose 4.6%. Excluding energy and agri food, import prices increased 0.4% month-on-month and decreased 0.5% from the prior year. What is, I suppose, most disturbing about this whole picture is the way in which some inflation components are accelerating even as the euro continues to reach ever newer highs, which should, in principle, be serving to slow inflation.



Not everything coming out of France this week has been unequivocably bad news though, since the retail sales purchasing managers index shot up in February.




In fact French retail sales advanced the most in 20 months in February, driven by declining unemployment (another piece of positive news) and seasonal discounts, the NTC Economics compiled Bloomberg purchasing managers index showed. The measure of sales climbed to a seasonally adjusted 58.8, the highest since June 2006, up from 56.2 in January, the survey which is based on the responses of 390 retail executives showed at the end of last week. A reading above 50 indicates expansion. Possibly also of note here was that retailers, who stressed that they faced higher purchasing prices, reported declining margins, with this index component decreasing to 48.8 from 50.8 in January. Some of them also reported squeezing prices to attract customers.

But at the end of the day, France's steadily improved employment numbers may well help to continue to underpin consumption to some extent.