There is much to consider right now in the outlook for Europe and the Euro area’s largest economy. A developing theme for 2015 has been the decline in world trade prospects that I discussed on the 26th of August with this currently symbolised by the Baltic Dry Index for shipping rates which at 881 is some 14% below the level of one year ago. This matters a lot for a country which runs such a large export surplus and of course is entwined with the apparent slow down in the economy of China. According to the German statistics office the last year there was a trade deficit was 1951 and last year saw a record trade surplus of 216.9 billion Euros.
Part of the reason for Germany’s trade surplus has been its reputation for quality engineering which going forwards has to have been dented by the Volkswagen scandal. You do not need to take my word for it just remember the phrase “never believe anything until it is officially denied” as you read this from the BBC below.
The Volkswagen emissions scandal was a “dramatic event” but would not inflict lasting damage on Germany’s reputation, Angela Merkel has said.
I am sure that Volkswagen was not alone as other car manufacturers produced cars with similar and in some cases better emissions performances. Putting this into context it has a share price of 100 now as opposed to the peak of 254 in August.
We can add the Volkswagen effect as a factor for monetary policy too as it has impacted on the Dax equity index and we know that central banks like to quote “wealth effects” from higher equity markets. However the Dax at 9747 is now (just) down in 2015 as well as being around 20% lower than this years highs and only 6% up on a year ago. Something of a disappointment for the QE (Quantitative Easing) policy of the ECB and not something to boast about at central banking dinner parties.
Indeed the ECB may be wondering what bang it is getting for its buck or rather Euro in Germany. It has purchased some 80.8 billion Euros of German government bonds including some 11.8 billion Euros in September alone. Indeed Euro area taxpayers may wonder why they are giving an implicit subsidy to Germany? This is because all the way out to the 5 year maturity the yields are negative and the ECB will therefore take a loss on bonds held to maturity with the German Treasury making a corresponding profit. Mostly this will be transferred to the German Bundesbank as we see yet another example of “innovative” modern finance at the central banking level.
There is of course the elephant in the room which is did Germany need QE? If you take the view that the Euro project for Germany was a way of getting a more competitive exchange-rate for its exporters then it will welcome the around 6% lower trade weighted exchange rate it has brought. However some care is needed here as since QE actually began it has sung along to The Detroit Spinners.
I’m working my way back to you, babe
To get the 6% fall I am allowing for the announcement/expectation effect and going into a type of alternate universe where something which has yet to happen has an effect.
Population and Migration
This is quite a double-edged sword right now. Germany does have its own demographic issues along the lines of the Japanese ones I analysed yesterday albeit not as severe. In terms of the percentage of the population over 65 Germany had 21.1% at the end of 2014 as opposed to 19.9% in 2007 or is where Japan was in 2007 (h/t Vconomics). We will see if it has the acceleration Japan has seen since (25.8% now). For those wondering the UK is at 17.5%. On longer-term grounds getting in migrants is a bonus but of course the recent road has been a bit more than bumpy. From Bloomberg.
With an estimated 800,000 people seeking shelter in Germany this year, the government has earmarked more than 6 billion euros ($6.7 billion).
The situation is in a state of flux with some reports saying that 1.5 million are now expected. As we have seen in the UK this poses all sorts of questions for schools and hospitals for example. It also assumes that they are coming to work rather than for other reasons. Accordingly the jury is out here. In the longer-term if people settle it is indeed a win for Germany but if they do not it will be an example of where rising GDP can be as much of a problem as a benefit.
It was only a few short weeks ago that I pointed out that in 2015 so far the Greek economy has grown faster than that of Germany! That will end in the third quarter as the Greek economy shrinks but what is the outlook for Germany?
The Markit Purchasing Managers Indices series has completed this morning so let us investigate.
Germany’s manufacturing sector lost some of its growth momentum in September, with the headline PMI down slightly since August. Nevertheless, the average for the third quarter as a whole was the best in over a year,
The results from the Services PMI come on the back of positive manufacturing numbers, suggesting that the upturn in Germany’s private sector remains broad-based. The data are consistent with moderate GDP growth in the third quarter.
German retailers reported further sales growth in September. Despite the rate of increase easing to a three-month low, the average reading for the third quarter was the best in almost nine years.
These show that Germany had a good third quarter for the year but that there was something of a slow down in growth in September. Actually the September dip was seen by quite a few countries including the UK.
This told a somewhat different story this morning.
the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing in August 2015 decreased a seasonally and working-day adjusted 1.8% on July 2015. In July 2015, the decrease on the previous month showed a corrected –2.2% (primary –1.4%).
Previously if we allow for the inevitable monthly fluctuations it had been heading upwards but as you can see there will need to be quite a rise in September for the third quarter of 2015 to be even flat let alone the 3% growth of the previous one. So we have quite a different picture is we compare it to the Markit business surveys.
If we are looking for stereotypes we can look at Kraftwerk who spent up to 22 minutes in the song Autobahn in essence telling us this.
We drive, drive, drive on the motorway
At least the Tom Robinson Band offered some lyrical variety in 2-4-6-8 Motorway! But yesterday we saw the Chief Economist of the German Finance Ministry in similar vein in the Financial Times.
Such an approach is also needed for public finances. Nations such as Germany have a strategy geared towards resilience, but face criticism for it.
However he also made some extraordinary observations.
Germany’s sound public finances are also the basis for European stability.
This skips past the role of the German economic model in creating the crisis but even this is dwarfed by this bit.
The myopia in macroeconomic policy contrasts with much more convincing global action to repair the banking sector.
Deutsche Bank anyone?
So Germany seems set to continue with its model of an artificially lower currency via its membership of the Euro (just imagine where a German Deutschmark would be now!) and export surpluses. If the migrant crisis provides it with a new labour supply then its future may be kicked like a can around a decade forwards. There are dangers from the Chinese slow down but perhaps the ECB will respond by pushing the Euro lower. The trouble is that one of the ways that the world got into its current malaise was via imbalances like the German trade surplus. It speaks for itself that it was 195.3 billion Euros in 2007 and 216.9 billion in 2014.
What is the German for I’m all right Jack?