One of the regular themes of this blog has become the economic travails of various members of the Euro area. Often their position can be compared to that of the country that has mostly been an economic locomotive through this period which is Germany. However there have been an increasing number of signs recently that Germany is in a rough patch such that if it were a rower we would be describing its performance as having caught a crab. Indeed the possibility that Germany be experiencing a recession is increasing and may be on the verge of becoming a probability. That poses all sorts of questions for the overall euro area as it is the not only the largest economy but so far has outperformed its peers substantially.
Today’s industrial production data
The headline does have no little shock value.
Production in August 2014 down a seasonally adjusted –4.0% on the previous month on a price, seasonally and working day adjusted basis according to provisional data of the Federal Statistical Office (Destatis).
Also the numbers have been flattered by energy and construction output which are included in the overall numbers.
Production in industry excluding energy and construction fell by –4.8%.
The heaviest category decline is shown below.
Within the industry was recorded with the manufacturers of capital goods by –8.8%, the highest decline.
As you can imagine there has already been a debate over the numbers in the short time since they were released. Deutsche Bank (h/t @Liuk_ ) argues that the 25% month on month fall in car production represents a change in the timing of the annual holiday season. Others are arguing that whilst there may have been an effect here it does not fully explain what has happened. If we try to net this off by looking at July production (up 1.6% on an annual basis) we see that whilst the scale of the fall is reduced there is still one.
I am sure that many looking at these figures will be wondering how much impact there has been from the problems of Ukraine and the subsequent economic sanctions applied to Russia. For once the UK performance (manufacturing up by 3.9% on an annual basis in August) is far better than Germany’s with no doubt some wags already questioning whether rebalancing is a good idea. Of course the clue is in the phrase “for once”.
The problem with seeing the above numbers as a one-off is that it also ignores the industrial order data which was released only yesterday.
Price-adjusted new orders in manufacturing in August 2014 decreased a seasonally and working day adjusted 5.7% on July 2014 (following +4.9% in July 2014 on June 2014)
So not only was output lower in August but orders and hence likely future production was depressed too. We perhaps get some further clues to the state of play from the geographical split.
Domestic orders decreased 2.0% and foreign orders by 8.4%. As regards the direction of trade in foreign transactions, new orders from the euro area were down 5.7% on the previous month, while new orders from other countries declined by 9.9%.
As you can see there was a slow down in domestic orders but something of a plummet in foreign orders. We do have some information on the scale of the effect of the sanctions on Russia from earlier this year. From DW.
The value of German exports to Russia dropped by 15.5 percent to 15.3 billion euros ($20.6 billion) in the first half of 2014, the German national statistics office (Destatis) reported.
As the sanctions have been tightened it is reasonable to believe that the impact of them on the German economy has increased too.
The IFO and ZEW Surveys
Towards the end of last month this was released and the message was grim.
The German economy is no longer running smoothly.
Perhaps that has more symbolism in the original German! The actual detail of the report is shown below.
The Ifo Business Climate Index for industry and trade in Germany fell in September to 104.7 points from 106.3 points in the previous month. The index dropped to its lowest level since April 2013.
Particularly noticeable was the expectations component of the index which fell to 99.3 on a scale where 2005=100 and January of this year saw the recent peak of 108.8. This measure can be hard to read but an expectations index which has fallen every month in 2014 does send out something of a drumbeat.
The ZEW survey gives a very similar message as it too has been falling throughout 2014 from a peak of around 60 at the beginning of 2014 to this now.
After slight losses (minus 1.7 points) in September, the ZEW Indicator of Economic Sentiment for Germany stands at 6.9 points (long-term average: 24.6 points).
The Retail Sector
This too seems to be catching something of an autumnal cold. Yesterday’s purchasing managers report told a by now familiar story.
Retail sales fall at sharpest rate since April 2010………Headline retail PMI drops to 53-month low of 47.1….Retail sales also fell at a faster pace on an annual
basis in September.
So production is unlikely to be boosted by retail sales anytime soon although German retailers did increase employment so they were not that hard-pressed.
What about the service-sector?
This is the one current bright spot according to the purchasing managers report as show below.
In contrast to the struggling manufacturing sector,
Germany’s service sector continued to power
ahead at the end of the third quarter. Output and
new orders rose sharply and companies continued
to take on additional workers, boding well for the
Although looking forwards it too seems to be fearing that the slow down will spread to it.
However, service providers’ confidence towards
the business outlook fell to a 15-month low
It comes on top of this
The German economy is losing momentum. As the Federal Statistical Office (Destatis) already reported in its first release of 14 August 2014, the gross domestic product (GDP) decreased 0.2% – upon price, seasonal and calendar adjustment – in the second quarter of 2014 compared with the previous quarter.
Germany was still growing on a year on year basis (1.2% seasonally adjusted) but that was slowing.
With a little help from my friends
The impact of the ESA 10 changes did not bypass Germany.
The recalculation as part of the 2014 revision of national accounts has led to an increase in the nominal gross domestic product by an average of roughly 3%;
Although apparently the Germans are very law abiding for those of you wondering about the composition of the increase.
The coverage of illegal activities such as drug production and trade and smuggling of cigarettes is less important in terms of quantity, accounting for just under 0.1 percentage points of the overall effect.
There is much to consider right now about the state of play of the German economy. Maybe it will avoid a recession- two consecutive quarterly falls in economic output- and maybe it will not but this is certainly a path which it would have hoped to avoid. There will be questions for example about whether its policies needed to be as austere as they have been.
Net lending of general government amounted to 16.1 billion euros in the first half of 2014 according to provisional results of the Federal Statistical Office (Destatis). When measured as a percentage of the gross domestic product at current prices (1,425.8 billion euros), this results in a ratio of +1.1%.
Yes that is a government running a surplus which of course is an increasingly rare breed in these times. Such an event will be a factor in the numbers below but as someone who has spent much of his career observing and analysing bond markets I cannot help but feel a very strong message is being sent by the German bond market right now. The two-year yield has been negative for several weeks now and is -0.06% as I type this and the five-year yield is a measly 0.16%. If people are willing to put their money into such things they must have poor hopes for any alternatives must they not?