It was only yesterday that I examined a danger to the German financial system via the ongoing problems of some of its Landesbanken. In that particular instance it was Bayerische Landesbanken which continues to see more problems pile up after its ill-fated investment in Hypo Alpe Adri Bank of Austria. However there are signs that the real economy in Germany is gaining some momentum and it is this which I wish to examine today.
It would appear that the retail sector in Germany is in rude health if today’s release from the German statistics office is any guide.
retail turnover in January 2015 in Germany increased 5.3% in real terms and 4.1% in nominal terms compared with the corresponding month of the previous year……This was the highest real rate of change compared to the previous year’s month since June 2010 ( + 6.0%)
When adjusted for calendar and seasonal variations (Census-X-12-ARIMA), the January turnover was in real terms 2.9% and in nominal terms 2.2% larger than that in December 2014.
As you can see this is quite a strong number and in fact if repeated in 2015 would help with one of the Euro areas main issues which is that it would like domestic demand in Germany to be higher. On this road Germany would suck in imports from the rest of the Euro area and give them a boost too. These are the stuff of Euro area fantasies but to some extent in January they looked as if they might come true.
Wages in Germany
Some of this improvement can be put done to some outright wage growth in Germany as highlighted below by Reuters.
German negotiated wages including special payments climbed by 3.2 percent on average last year – the biggest increase since the statistics were first compiled in 2010 – boding well for private consumption to drive growth this year.
I note that such wages cover a large group and led to real wage increases for them.
Wages for the roughly 19 million workers covered by negotiated wage deals rose more than three times as steeply as inflation, which was at 0.9 percent on average last year.
The increase was far stronger than in 2013, when workers under collective wage agreements had a 2.4 percent pay hike and in 2012, when their paychecks increased by 2.7 percent.
I think that “far stronger” is going a bit far but there was an improvement in nominal wage growth. But a major player here has been the fall in inflation which has led to a further boost to real wages. In many ways this is a repetition of the positive impact of falling inflation which I discussed as a boost to the UK,Spanish and Irish economies back on the 29th of January.
This is of course rather contrary to one of the themes of these times but for the moment Germany has found itself in an oasis of real wage growth. As we look forwards some of this appears to be continuing. From Reuters.
Engineering union IG Metall secured a 3.4 percent wage increase for 15 months from April plus a one-off payment of 150 euros in a deal that is likely to benefit 3.7 million workers.
This part of the labour market appears to be in good health too.
In January 2015, roughly 42.5 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). That was an increase of 412,000, or 1.0%, compared with January 2014. The year-on-year increase in employment thus continued unabated.
What is not to like about more people in employment earning higher nominal and real wages?
Low Inflation As An Economic Benefit
On Friday we were told this by the German statistics office.
The inflation rate in Germany as measured by the consumer price index is expected to rise 0.1% in February 2015 on a year earlier.
I wanted to reinforce the point that so far the falls in inflation have given the German economy a boost. This is very different from the media spinning and the use of the word deflation as something of a threat. You know the economic world is about to end and in some extreme instances has ended! Oh and as to actual deflation which is a fall in aggregate demand.
The German economy gained momentum again towards the end of the year…. the gross domestic product (GDP) increased by 0.7% (adjusted for price, seasonal and calendar effects) in the fourth quarter of 2014 compared with the third quarter of 2014. ……….As reported earlier, this resulted in a 1.6% increase (also adjusted for calendar effects) for the whole of 2014, which is even slightly higher than the provisional figure published in January.
As you can see from the numbers above it looks as though the falling inflation period has been accompanied by an acceleration in the engine room of Germany’s economy. As ever correlation does not prove causation but it is in my opinion building a strong case.
Also we see a familiar break down of the inflation as whilst prices are falling in the good sector at an annual rate of 1.4% they are rising in the services sector by the same amount.
The latest business surveys point towards more economic growth for Germany.
Private sector activity growth in Germany
accelerated further in February, as highlighted by
the seasonally adjusted Markit Flash Germany
Composite Output Index rising from January’s
53.5 to a seven-month high of 54.3. Survey
participants commented that strong order intakes
and a positive economic environment contributed to
the latest increase in output.
This was from late February and yesterday we were told that the manufacturing sector has edged forwards.
The slight improvement in the headline number
largely reflected a stronger rise in new business
placed with German manufacturing companies.
The Euro depreciation
If there is a Euro area economy which is likely to benefit from the recent fall of the Euro then let me present the German economic locomotive. Whilst the largest and indeed sharpest falls have come since mid-December last the effective rate of the Euro has been falling over the past year and has dropped from nearly 105 to below 94. Thus there will be a competitive advantage provided to all Euro area businesses who are in price competitive areas and Germany is likely to be in the fore front of this. Any inflationary impact has coincidently been more than offset by the fall in commodity and oil prices which has taken place.
First let me welcome what is good news. Let me welcome it with the words of the Fab Four.
Here comes the sun
Here comes the sun,
and I say, It’s all right
It is a very spring like metaphor as we wait for it to well, spring. It is also very different to what the middle of 2014 looked like for Germany.
It’s been a long, cold lonely winter
It feels like years since it’s been here
I guess it shows us what a falling oil price combined with a falling exchange rate does to an exporting nation and how quickly it can fire up the engines. Where this leaves the European Central Bank with its plans to further expand monetary policy via some 1.1 trillion Euro’s of Quantitative Easing I am much less sure. The largest recipient of this will be the Germany of economic growth as monetary policy goes pro-cyclical.
After yesterday’s update on the problems of Heta Bank and Austria it is revealing of these times to note this. (H/T @Schuldensuehner )
Minus is the new normal.
#Austria sells 5yr Bonds at -0.038%, First negative yield at an auction.