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Saturday, March 15, 2008

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.

Monday, March 10, 2008

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.