The outlook for the economy of Germany has plenty of dark clouds

Sometimes it is hard not to have a wry smile at the way events are reported. Especially as in this instance it has been a success for my style of analysis. If we take a look at the fastFT service we were told this yesterday.

German industrial production unexpectedly drops in November.

My immediate thought was as the German economy contracted by 0.2% in the third quarter we should not be surprised by declines. Fascinatingly the Financial Times went to the people who have not been expecting this for an analysis of the issue.

German data released over the past two days have painted a glum picture for how Europe’s biggest economy performed during the latter part of 2018. fastFT rounds up what economists and analysts have said about what is happening. Anxieties over global trade wars and political uncertainty in the eurozone have taken their toll, and Europe’s powerhouse is showing signs of fatigue. Questions of whether a recession is looming have also been raised, while many economists remain cautiously optimistic in their prognosis.

If we now switch to what we have been looking at I wrote this on December 7th about the situation.

If we look at the broad sweep Germany has responded to the Euro area monetary slow down as we would have expected. What is less clear is what happens next? This quarter has not so far show the bounce back you might expect except in one area.

So not only had there been an expected weakening of the economy but there had been at that point no clear sign of the promised bounce back. What we know in addition now is this which was released on January 3rd.

  • Annual growth rate of broad monetary aggregate M3 decreased to 3.7% in November 2018 from 3.9% in October
  • Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 6.7% in November, compared with 6.8% in October

So another decline and if we look for a trend we would expect Euro area growth to continue to be weak and this time around that is being led by Germany. The link between monetary data and the economy is not precise enough for us to say Germany is in a recession but we can expect weak growth at best heading into the early months of 2019. The FT does to be fair give us a brief mention of the monetary data from Oxford Economics.

lending growth remaining robust

The problem with that which as it happens repeats the argument of Mario Draghi of the ECB is that it is a lagging indicator in my opinion as banks respond to the better economic news from 2017.

As these matters can be heated let me make it quite clear that I wish Germany no ill in fact quite the reverse but the money supply data has been clear and has worked so far. Frankly the way it is still being widely ignored suggests it is likely to continue to work.

This week’s data


This morning’s release started in conventional fashion as we got the opportunity to observe yet another trade surplus for Germany.

 Germany exported goods to the value of 116.3 billion euros and imported goods to the value of 95.7 billion euros in November 2018………The foreign trade balance showed a surplus of 20.5 billion euros in November 2018. In November 2017, the surplus amounted to 23.8 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 19.0 billion euros in November 2018.

In world terms an annual decline in Germany’s surplus is a good thing as it was one of the imbalances which set the ground for the credit crunch. But if we switch to looking at this on a monthly basis this leapt off the page at me about imports.

-1.6% on the previous month (calendar and seasonally adjusted)

A fall in imports is a sign of a weak economy as for example we saw substantial falls in Greece back in the day. There are caveats to this of which the biggest is that monthly trade data is inaccurate and erratic but such as the numbers are they post another warning. The other side of the balance sheet was more conventional in that with current trade issues one might expect this.

also reports that German exports in November 2018 remained nearly unchanged on November 2017.

Let us move on by noting that due to the way that Gross Domestic Product or GDP is calculated lower imports in isolation provide a boost before a “surprise” fall later as it filters through other parts.


If we step back to Monday there was some troubling news on this front.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in November 2018 a seasonally and calendar adjusted 1.0% on the previous month.

So not much sign of an improvement and it was hardly reassuring that geographically the issue was concentrated in the Euro area.

Domestic orders increased by 2.4% and foreign orders decreased by 3.2% in November 2018 on the previous month. New orders from the euro area were down 11.6%, new orders from other countries increased 2.3% compared to October 2018.

Then on Tuesday we got disappointing actual production numbers.

In November 2018, production in industry was down by 1.9% from the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). The revised figure shows a decrease of 0.8% (primary -0.5%) from October 2018.

So November has quite a fall and this was compared to an October number which had been revised lower. This meant that the annual picture looked really poor.

-4.7% on the same month a year earlier (price and calendar adjusted)

Business surveys

At then end of last week we were told this by the Markit PMI ( Purchasing Manager’s Index) at the end of last week.

December saw the Composite Output Index fall for the fourth month running to 51.6, down from 52.3 in
November and its lowest reading since June 2013.
The latest slowdown was led by the service sector, as the rate of manufacturing output growth strengthened for the first time in five months, albeit picking up only slightly and staying below that of services business activity.

The problem for Markit is that rather than leading events they are lagging them as they are recording declines after the economic contraction in the third quarter. If we took them literally then the economy would shrink by even more this quarter! Anyway they no seem to be on the case of the motor industry. From yesterday.

Latest data indicated a worsening downturn in the European autos sector at the end of 2018. Production of automobiles & parts fell for the third month running, and at the fastest rate since March 2013. New orders fell sharply, with new export business (including intra-European trade) declining at the fastest rate in six years.


The German economy found itself surrounded by dark clouds as 2018 developed and as I am typing this we have seen more worrying signs. From @YuanTalks.

It’s the FIRST YEARLY DROP in at least 20 years. Passenger car sales slumped 19% y/y in Dec 2018 to 2.26 mln vehicles.

Over 2018 as a whole car sales fell by 6% so we can see the issue is accelerating and there are obvious implications for German manufacturers. It has been accompanied by another generic sign of possible world economic weakness from @LiveSquawk.

Exclusive: Apple Cuts iPhone Production Plan By 10% – Nikkei

Suddenly there is a lot of concern over a German recession or as it is being described a technical recession. In case you were wondering that means a recession that is within the error range of the data which actually covers most of them! Because of these errors it is hard to say whether the German economy grew or contracted at the end of last year, as for example wage growth should support consumption. But what we can say is that the broad sweep from it to the like;y trend for the early part of 2019 is weak. Perhaps some growth but not much after all even 0.2% growth in the final quarter would mean flat growth for the second half of the year.

For those who think ECB policy is set for Germany this poses quite a problem as it has ended its monthly QE purchases just as things have deteriorated in a shocking sense of timing. But to my mind just as bad is the issue that my “junkie culture” theme that growth was dependent on the stimulus also gets a tick including something of a slap on the back from Mario Draghi who seems to have come round to at least part of my point of view.

I’ll be briefer than I would like to be, but certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

According to Handelsblatt every little helps.

Germany has saved €368 billion in interest costs on its debt thanks to record low interest rates since the financial crisis in 2008, according to Bundesbank calculations. That’s more than 10% of annual GDP.





9 thoughts on “The outlook for the economy of Germany has plenty of dark clouds

  1. Auto output is bound to be down. In just a few months you will be hammered for driving a 4 year old diesel car in central London at any time of the day. Any diesel car before the later part fo 2015 will be hit by the ULEZ and yet you will be able to drive petrol cars from 2005 onwards. Given a significant proportion of German manufactured cars are/were deisel you can see how this might have an effect. I have literally no idea what I should buy when my current vehicle becomes uneconomical to repair as I drive long distances and have to enter London. At present I can skirt the ULEZ but in a few years time it expands to the boundaries of the north and south circular.

    Other cities may follow suit. Manchester has been threatening this for a while. I have no issue with regulation to improve air quality but telling me a 4 year old vehicle cannot be driven without a large daily payment comes across as unfair. People feel they were misled into buying diesel and a car is an expensive purchase. If I buy a modern deisel that currenly complies will I get hit again when someone changes their mind.?This is the thought that must be crossing puchasers minds and so they wait to see what happens with the cost and range of Hybrid and Electric vehicles. 4 years is less than the length of some Personal Contract Plan schemes and the resale value at the end will fall.

    In the UK we love buying German made vehicles in a sort of crazy reverse patriatism. This has to be affecting the German economy.

    • I think there has been mis-selling on a gigantic scale of diesel. As I see it
      1. German manufacturers saw a competitive advantage in their production of diesel cars
      2. They lobbied governments to promote diesel
      3. We all bought diesel
      4. We then find out that the emissions tests were faked
      5. Governments tell us how wicked we were buying the aforesaid diesels
      6. In the USA, but not Europe, consumers were compensated through the court and federal system.
      Bottom of the heap are therefore European buyers of fraudulently marketed diesel cars.

  2. The bigger picture is diesel, the major transport and agricultural fuel is drying up as conventional oil deposits decline to be replaced by shale (and other unconventional sources).

    These sources cannot supply the heavier distillates (bunker oil for shipping, diesel for transport) in anything like the amount required.

    There is a concerted effort to get the private road user off diesel. Differing approaches as we can see here in the UK compared to France’s approach but the fundamental reasoning is the same, conserve diesel for transport while other solutions are found.

    Peak oil is here and this is one way it is manifesting itself

    • Interestingly even Venezuela has bearing on this (they produce very heavy oil) it has been mooted that the US intends to use this oil to ‘mix’ with her own shale oils to try and plug the gap in heavy distillate production

      • indeed Dilbit is used for Canada – I believe the pipeline is maxed out though and cannot use more LTO from the States. With any heavy to very heavy oils ( aka Asphalt 🙂 ) its more like mining operation than a drilling one.

        Venezuela doesn’t want to ship it’s bitumen to the USA but even it does , putting the military in command like it has , does not mean it can stop the decline in its output – the skilled staff are leaving. I note the US has its refineries optimized for heavy oil too , and not LTO .

        As this applies to Germany ? well they have had issues with their Green solution. Leccy is nearly twice as much as ours and they rely on Russian Natgas and poor quality coal ( as they won’t use Nuclear – quite happy to buy French Nuk power though until Macron scraps the French nuclear industry ….)

        Then Germany will out bid us on Norway’s natgas too , how then will we run out homes and industry on cold windless nights ? ( 20 GW now of wind capacity that at its max gave us a few hours of 14.9GWh and, on cold windless days, was as low as 0.38GWh- the load being taken by gas and coal generation ) current load factor is 19% , not a 33% as assumed , and also calculated back 38 years of good weather data too. Don’t think its been done with solar yet but without a good battery solution to cover several weeks I don’t see us being able to stop gas and coal generation …… mind you I doubt that would stop , say, the Labour party from trying !

        Interesting times ahead.


        PS: I ‘ll have t check but I don’t think Germany has worked out much more “green” power it will need to replace its commercial and residential fleet ( cars, trucks , trains yet alone boats and planes……)

        • Forbin,
          I hope you aren’t suggesting the entire EU political class is run by incompetent and/or corrupt treasonous politicos that would sell their country out for a few shekels, believing in scams such as global warming to justify the economic collapse of their economies by the closing down of cheap carbon based generating stations and their replacement by intermittent/unstable “green” alternatives?
          And if that were to happen in this country, and we ended up in the position we expect, being outbid in an escalating bidding process for winter electricity supplies, by buying gas at ever higher prices(falling value of sterling adding to the price to prevent house prices from falling)we will surely blame Russia(who will probably end up supplying it), that is all white van man and the rest of the sheeple will need to be told, when explained to them by the BBC, the Daily Mail, the Sun and other mainstream media.

  3. Hi Shaun
    Very interesting as ever.
    On the refusal of the media to attach importance to money supply data, I would make a couple of comments:
    1. I don’t think that the media in general can cope with the concept of a lag time. The idea that something happening today affects something in 18 months’ time does not really work with them
    2. I think that following the money supply was tainted in the eyes of many in the media by its olitical association with Mrs Thatcher and her association with Patrick Minford.
    It’s so much easier to cut and paste ECB/IMF/ government statistics than it is to analyse data especially with a lag time that the mainstream media seem to have given up.

    • Hi James

      You are right that the media wants quick hits these days which is why it so often charges in the wrong direction. The money supply saga in the UK was quite something and a matter I have studied in great detail as well as working through the latter parts.

      We had a choice between narrow money and broad money and chose broad money just as the financial system was being shaken up meaning the £M3 measure used missed some of it. The newly demutualised building societies for example. We had a type of reverse QE where we issued too many Gilts to try and soak up some liquidity but that didn’t help much. So Nigel Lawson went for a form of exchange-rate targeting ( older readers may recall a level of 3 Dm to the £) until that policy blew up as we were ejected from the ERM in the autumn of 1992.

      We will never know if the narrow money measure ( wide monetary base) would have worked better but we do know that apparently it was nobody’s fault….

  4. I’m wondering…. 11.6% fall in Eurozone orders… Which is bad… Will equate to huge losses in industrial output when? Depends upon what is being ordered I guess… So what is this likely to be? And is it a systemic change? Likely I would think…

    Lidl / Aldi in Eire not buying the German gadgets in their centre isles might explain some part of it? Tatty euro cars not ordering German components for their assemblies possibly assuming lovely tariffs post brexit? Electrical bits and pieces for white goods etc?

    Just musing and really don’t know but would be interesting to see some more detail as to what and why don’t you think?

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