Is Germany the new sick man of Europe?

The last twelve months have seen quite a turn around in not only perceptions about the performance of the German economy but also the actual data. With the benefit of hindsight we see that there was a clear peak at the end of 2017 when after a year of strong economic growth ( 0.6% to 1.2% quarterly) the annual rate of Gross Domestic Product or GDP growth reached 3.4%. Then things changed and quarterly growth plunged to 0.1% as 2018 opened as quarterly growth fell to 0.1%.

Actually there was a warning sign back then because looking at my post from the 3rd of January 2018 I reported on the good news as it was then but also noted this.

Although there was an ominous tone to the latter part don’t you think?! We have also learnt to be nervous about economic all-time highs.

This was in response to this from the Markit PMI.

2017 was a record-breaking year for the German
manufacturing sector: the PMI posted an all-time
high in December, and the current 37-month
sequence of improving business conditions
surpassed the previous record set in the run up to
the financial crisis.

Actually back then we did not know how bad things were because the GDP numbers were wrong as the Bundesbank announced yesterday.

In the first quarter, growth consequently totalled 0.1% (down from 0.4%), while it amounted to 0.4% in the second quarter (after 0.5%).

So as you can see we have something else to add to the issues with GDP as in this instance it completely missed the turn in the German economy. The GDP data in fact misled us.

If we move forwards to April 25th last year we see the Bundesbank had seen something but blamed the poor old weather.

The Bundesbank expects the German economy’s boom to continue, although the Bank’s economists predict that the growth rate of gross domestic product might be distinctly lower in the first quarter of 2018 than in the preceding quarters.

The “boom to continue” then went in annual economic growth terms 2.3%, 2.1%, 1.1%, 0.6%,0.9% and most recently 0.4%.If we switch to the actual level it is not much of a boom to see GDP rise from 106.04 at the end of 2017 to 107.03 at the end of the second half of 2019.

Looking Ahead

The Bundesbank has changed its tone these days or if you prefer has been forced to change its tone so let us dip into yesterday’s monthly report.

“The domestic economy is still doing well; the weaknesses have so far been concentrated in industry and exports. International trade disputes and Brexit are important reasons behind this,” Mr Weidmann said.

As you can see its President has a good go at blaming Johnny Foreigner and in particular the UK. Actually the latter is somewhat contradicted by the report itself as it points out Germany has also benefited from the UK in 2019.

In particular, exports to the United Kingdom were weak in the second quarter. A contributing factor to this, according to the Bundesbank’s economists, was the original Brexit date scheduled for the end of March. This resulted in substantial stockpiling in the United Kingdom over the winter months. This led to a countermovement in the second quarter.

Actually the report itself does not seem entirely keen on the idea that it is all Johnny Foreigner’s fault either.

“Sales in construction and in the hotel and restaurant sector declined. Wholesale trade slid into the downturn afflicting industry”, the Bank’s economists write. Only retail trade as well as some other services sectors are likely to have provided positive momentum.

So it is more widespread than just trade.In fact if we look at the details below we see that it was the 0.4% growth in the first quarter which looks like the exception to the present trend.

Construction output declined steeply after posting a sharp increase during the first quarter due to favourable weather conditions. Meanwhile, the demand for cars, pent up by delivery bottlenecks last year, had largely been met at the start of 2019 and did not increase further in the second quarter.

Ominous in a way as we wonder if it might get the same treatment as the first quarter of 2018. But if we take the figures as we presently have them then GDP growth in the first half of this year has been a mere 0.3%. But they are not expecting much better and maybe worse.

Economic activity could decline slightly again in the current quarter, the economists suggest. There are, they write, no signs yet of an end to the downturn in industry, adding: “This could also gradually start to weigh on a number of services sectors.”

They also touch on an area which concerns others.

Leading labour market indicators painted a mixed picture. Industry further scaled back its hiring plans. By contrast, in the services sectors, except the wholesale and retail trade, and in construction, positive employment plans dominated.

Is the labour market turning? This morning’s numbers only really tell us what we already knew.

The year-on-year growth rate was slightly lower in the second quarter than in the first quarter of 2019 (+1.1%) and in the fourth quarter of 2018 (+1.3%).

Maybe we learn a little more here.

After seasonal adjustment, that is, after the elimination of the usual seasonal fluctuations, the number of persons in employment increased by 50,000, or 0.1%, in the second quarter of 2019 compared with the previous quarter.

That number looks a fair bit weaker.

Markit PMI

This has not had a good run and let me illustrate this with the latest update from the 5th of this month.

The combination of a deepening downturn in manufacturing output and slower service sector business activity growth saw the Composite Output Index register 50.9 in July, down from 52.6 in June and its lowest reading in just over six years.

Yes it shows a fall but it has continued to suggest growth for Germany and sometimes strong growth when in fact there was not much and then actual declines.

Comment

The situation here is revealing on quite a few levels. Let me start with one perspective which is ironically provided by ECB President Mario Draghi when he suggested his policies  ( negative interest-rates and QE) added 1.5% to GDP. That was for the Euro area overall but if we apply it to Germany we see that the boom fades a bit and more crucially the German economy started “slip-sliding away” as soon as the stimulus began to fade. That is rather a different story to the consensus that it is the southern European countries that have depended most on stimulus policies.

Next is the German economic model which relies on exports or if you prefer demand from abroad. We have seen a phase where this has been reduced at least partly due to the “trade war” but also I think that the issues with diesel engines which damaged the reputation of its car manufacturers hit too. Whatever the reason there is not a lot behind it in terms of domestic consumption.

The issue with domestic consumption gets deeper as we note that economic policy is sucking demand out of the economy. At the beginning of the year the finance ministry thought that the surplus would be 1.75% of GDP. That seems much less likely now as economic growth has faded but it is one of the reasons why we keep getting reports that Germany will provide a fiscal stimulus which reached 50 billion Euros yesterday. With all of its bond maturities showing negative yields it could easily do so and in fact would be paid to do it, but it still looks unlikely as I note the mention of a “deep recession” being required.

As to my question in some ways the answer is yes. But we need to take care as the domestic consumption problem was always there and once export growth comes back we return to something of a status quo. I also expect the ECB to act in September but on the other side who would expect Germany to be the economic version of a junkie desperate for a hit?

 

 

 

 

15 thoughts on “Is Germany the new sick man of Europe?

  1. Hello Shaun,

    Germany better not be the “sick man” of Europe as all its dependent countries are relying on them to bail them out !

    sorry the EU to fund them ….

    Forbin

    • It’ll be interesting to see as well whether NIRP destroys what’s left of Deutsche Bank and a host of Italian banks.

      Looks like Merkel should have got a better deal of Theresa.

    • Unfortunately the stats don’t paint a pretty picture and when too many cards are placed on top of one another in a pyramid they will eventually collapse.

      The same principle applies to every other country with unsustainable debt and no growth.

  2. Shaun, thanks for shaping a balanced view. As you point out they not be a power house but they are still stable and solvent.

  3. The germans do not consume as much as we do, they export it instead – or do not import it. Household debt as %of GDP Germany 53.6 UK 94.2. I think they have the better plan, save now consume later.

    • True but if the UK cut down on its consumption of wine and other imports it would hit them badly in the pocket.

      If Margaret Thatcher was still MP she would be flying the UNION Jack and say buy British and have been doing so over 3 years ago, the European farmers would have been very vocal and pleaded with Europe to come up with a deal.

  4. Great blog as usual, Shaun.
    In a February podcast you mentioned the methodology change in the German HICP for package holidays; the methodology in the German CPI was also changed. This month FT had an item about it, “Volatile inflation data reflect Germans’ love of package holidays”. It notes that the old method only used data on traditional winter and summer holiday trips, whereas the new one prices trips “over the entire year”, presumably in every month of the year. So it was similar to a change made in the Canadian CPI when it expanded its pricing of travel tours from the winter months of January to March to all months of the year, with its September 2013 update. It was quite an adjustment at the time because the 12-month rates of change for the series for most months were meaningless, and those of the All-items CPI, targeted by the Bank of Canada, were contaminated. The problem only disappeared with the September 2014 update. The German CPI change was much less problematic because Germany does not have a no-revision policy for its CPI. With the January 2019 update, the index was revised back to January 2015 as a 2015=100 Laspeyres index with the new package holiday methodology, so 12-month rates of change were available based on the new methodology back to January 2016.
    While the Canadian change was certainly a desirable reform, it didn’t go nearly so far as it could have. It would have been a perfect opportunity for Statistics Canada to switch to the Rothwell formula in calculating a CPI for this highly seasonal commodity, 12 years after it had been introduced to calculate the Canadian equivalent of UK’s output agricultural price index. Unfortunately, Statistics Canada, like Yasser Arafat, never misses an opportunity to miss an opportunity, and nothing was done to move away from the existing dysfunctional annual-basket formula, then or since. I won’t be similarly critical of the German reform because I don’t understand what the German methodology was, before or after. If I remember correctly your podcast suggested that they had switched away from a seasonally-weighted formula in February, but nothing I could find online either confirms or discredits this. I have written today to Destatis about it in English; hopefully they will respond to me.

    • Hi Andrew and thank you

      Yes I do remember the change and the discussion we had back then. I did find some research on the subject in English back then and seeing your request have reminded myself of this from the ECB in March.

      “The German price index for package holidays now shows a more meaningful seasonal pattern. While the previous method used seasonal expenditure weights – i.e. different weights in the price index for package holidays taken at different times of the year – the new approach uses annual weights that are kept fixed over the entire year. This means that the price index for package holidays is no longer affected by the switch between seasonal weights at the beginning and end of seasons. However, the application of fixed weights implies that, during out-of-season periods, when prices for seasonal trips are not observable, the missing changes in prices have to be estimated. For instance, in summer it is necessary to include estimates for the changes in prices of trips normally taken in the winter, and in the winter it is necessary to use estimates for the changes in prices in the summer. The estimation is done by means of imputation, where changes in holiday prices in out-of-season periods are estimated on the basis of the price dynamics of other trips actually conducted in that season. Whereas the former approach treated winter and summer holidays separately, the new integrated sample also includes destinations to which trips are made over the entire calendar year. This establishes a relationship between price developments of seasonal trips.”

      https://www.ecb.europa.eu/pub/economic-bulletin/focus/2019/html/ecb.ebbox201902_05~8d798731bd.en.html

      I will be interested to know what you think of the changes and if you get a full reply from Detstatis.

      • Thank you very much for the link, Shaun. You are right as usual and the Germans really have made a switch from seasonal to annual weights. I have corresponded with Martin Eiglsperger, and he is very knowledgeable on such issues, so if he says so then that is the way it is. I can’t agree with him though that an annually-weighted index gives a more meaningful seasonal pattern than a seasonally-weighted index, certainly not if the Rothwell formula were used. However, he doesn’t say what seasonal formula was used. I will try to ask him about it tomorrow and hope for a response. The seasonal formula used in the Canadian CPI from 1961 to April 1973 gave an absolutely nonsensical seasonal pattern for subaggregates although it was OK at the total seasonal food level. I doubt the Germans would have used that formula, but who knows. Anthea Foster, who was in charge of our price index research in 1960, wanted the Canadian CPI for seasonal food to switch to the Rothwell formula with the basket updating in 1961, instead of the seasonal formula adopted. This was just a couple of years after Rothwell published her seminal paper. As I said, Statistics Canada never misses an opportunity to miss an opportunity. Thank you again for the reference.

  5. Do I have much sympathy if they are to become the “sick man of Europe”? Not at the moment as they couldn’t care a toss how bad things turn out to us in a no deal BREXIT so if things do go far worse all things being equal I hope they suffer more, and if Borris plays his cards right that is the way it will pan out.

    I was on the fence when we voted on the issue but the longer this has gone on the more resolute I am to leave with no deal and make the best of it.

    I take the view things never turn out quite as bad as the worst outlook and like to keep the faith and stay positive.

    • Hi Peter

      The slow down seen around the world affects us all and is something where we are for once all in it together. But some are more affected than others and Germany is in that category ironically because of a strength which is its exports. So in spite of the infighting we need each other…

  6. Pingback: Is Germany the new sick man of Europe? - Free World Economic Report

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