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Wednesday, August 06, 2008

The German Economy May Have Contracted By 1% In Q2 2008

As anticipated on this blog (and in my two posts on RGE European EconMonitor - here, and here) the German economy contracted in the second quarter, possibly by as much as 1% according to the Süddeutsche Zeitung newspaper who somehow or another seem to have gotten an advance glimpse of the economic data which is due to be officially released next week.

The Financial Times reports that government officials initially declined to confirm the report but that one spokesman later told the Financial Times: "The contraction will be in the order of magnitude of minus one per cent." The official added: "Bear in mind, though, that this is partly a correction after the exceptionally good first quarter."

This decline in economic output, if confirmed, is pretty steep and shows that the German economy, like much of the eurozone, is now possibly staring a looming recession straight in the face.

What most analysts seem to have failed to notice was that the 1.5 per cent jump in growth registered in the first quarter – which was the fastest increase in almost 12 years – contained a very strong (0.7%) component due to a sudden sharp rise in inventories. Strip these out of the second quarter - as inventories are reduced again - and you are bound to see some sort of significant correction. Add to this that demand for German exports is slowing, and you get contraction. What we now need to see is the extent to which this negative momentum carries over into the third quarter.

There is of course no suggestion whatsoever that the unusual leaking of the GDP
data out of Berlin could be intended to influence the European Central Bank ahead of its scheduled meeting on Thursday, when it is expected to leave interest rates on hold. Cough, cough, cough.

Industrial Orders Down In June

One indication that the contraction may well carry through into the third quarter was provided by the news this morning thatGerman factory orders fell for the seventh straight month in June. Orders, adjusted for seasonal swings and inflation, declined 2.9 percent from May, the Economy Ministry in Berlin said today. That's the biggest drop since July 2007. Orders were down 6.1 percent from a year earlier.

Now this news is important, since it will be reflected in the July and August industrial production numbers. Foreign sales dropped 5.1 percent, while domestic orders fell 0.6 percent in June. Orders from the euro area declined 7.7 percent and demand from outside the region fell 3.1 percent. That is, the position is clear, economic problems in Spain and Italy are slowly but surely dragging German export growth down, and when Germany has no export growth then recession is guaranteed.

The euro area, which takes just over 40 percent of Germany's exports, probably contracted 0.5 percent in the second quarter, according to the latest estimate from economists at the French bank Societe Generale.


Blog Sahibi said...

Good anticipation. In fact germany contracted by 0.6% I think, which is more than france and Italy. Am I wrong?


Edward Hugh said...


"Good anticipation. In fact germany contracted by 0.6% I think, which is more than france and Italy. Am I wrong?"

0.5% on a seasonally and working day adjusted basis, which is more than France (0.3%) and Italy (0.3%).

But I think it is important to realise that some of this is simply an inventory correction after excess activity in Q1, so the slowdown isn't as strong as it might appear. On the other hand, since Germany is export dependent, and these are slowing, the German economy may continue to contract in Q3, whereas the French economy will possibly rebound somewhat. Meantime Italy will continue to trawl the bottom, regardless of whether or not it contracts in Q3.