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Sunday, December 17, 2006

German Output and Exports

This is more like working notes than an analysis, but just to point out two things about the October data:

Firstly German industrial output fell in October:

German industrial production fell unexpectedly in October, with construction and energy output hardest hit, but economists said the data were probably a blip and that the outlook for the fourth quarter remained good.

Output declined in October by 1.4 percent month-on-month in seasonally adjusted terms, undershooting all forecasts, preliminary Economy Ministry data showed on Friday....

The output drop, the second monthly fall in succession, comes two days after data showed German manufacturing orders unexpectedly declined by 1.1 percent in October.

On the other hand:

The output figures contrasted with trade data from October released earlier on Friday. These showed Germany’s trade surplus hitting a record high, driven by strong demand for goods from around Europe, but especially from outside the European Union.

Indeed October seems to have been a really good month for German exports:

German exports unexpectedly rose for a fifth month in October, suggesting sales in Asia will help Europe's largest economy cope with a U.S. economic slowdown.

Exports climbed 2.6 percent from September, when they gained the most in more than four years, the Federal Statistics Office in Wiesbaden said today.

And just look at this:

Exports climbed 23 percent in October from a year earlier, with sales to countries outside the European Union jumping 31 percent, according to the statistics office.....Germany's trade surplus rose to 17.3 billion euros ($23 billion) in October from 15.6 billion euros a month earlier, the statistics office reported. Imports slipped 0.2 percent from the previous month.

The explanation for the difference between the industrial output performance and the strong export position is of course two fold:

1) In the first place there is a structural transition away from manufacturing and into services taking place.

2) In the second place domestic consumption still remains weak. October retail sales actually FELL year on year. In terms of my ageing society analysis this is hardly surprising:

German retail sales declined slightly in October, confounding expectations of rising consumer sentiment, according to government figures released Thursday.

Sales declined by 0.2 percent from September to October adjusted for calendar and seasonal effects, the Federal Statistics Office said. Compared with October 2005, sales declined by 0.8 percent.

So assuming that some of these sales were actually being brought forward from 2007 - to avoid the VAT rise - I'm really not sure I can agree at all with Sebastian Dullian at Eurozone Watch Blog when he says Honey, I shrunk the German VAT shock, since my feeling is that this is going to turn into a much bigger deal than most are imagining, and that when the shouting is all done, we will look at tax hikes as a means of addressing deficit problems in a very different light.


Anonymous said...

Dear Ed,
you have to keep in mind that German data is extremely volatile. The statistics office itself admits that retail sales data systematically have to be revised upwards. Usually the first upward revision happens two weeks after the first publications. Real retail sales for December 2005 for example showed a drop of 1.6 percent y-o-y in the first estimate published in January. Revised data for that month now shows an INCREASE of 0.6 y-o-y.
Concerning production and order data: That both time series have moved downward in concert rather points at a problem with the seasonal adjustment procedure, as usually output follows orders with a lag. Business surveys continue to point to a good order situation and brisk growth.
So, I am still more optimistic with regards to the German upswing.

Best, Sebastian

Edward Hugh said...

Hi Sebastian,

Thanks for the comment.

"you have to keep in mind that German data is extremely volatile."

OK, I take this point. But I do think there is a consensus that in Germany consumption has been structurally weak over quite some period of time, and the real issue is whether it will continue to remain this way, forming an opinion on which should be a mixture of theory and judgement, IMHO.

What impresses me is just how little extra consumption seems to be coming from the imminent VAT hike. Many are reading this as meaning (you perhaps) that the downside won't be important either. But we need to separate fluctuations from trend here. What if the trend is a lot lower than people are assuming? Then we might now have a fair sized upside (and especially in construction) and we may see the reverse of this as we move into 2007. This is the worry.

Now, if Germany were the only country with a median age of 43 which was experiencing weak consumption on a structural basis, then one might simply say, huh, and leave it at that.

But since applying Modigliani's life cycle saving theory to populations, and since we might expect increased saving followed by subsequent dis-saving, and since all three countries with the median age of 43 are showing weak internal consumption, and since no country with a median age of 43 is showing robust internal consumption, then I do think there is a prima facie case for imagining that something is going on here.

Next year, of course, we will all get to see.

Have a good xmas,