Is the Bundesbank still sure that Germany is not facing a recession?

The year so far has seen a development which has changed the economic debate especially in Europe.This is the malaise affecting the German economy which for so long has been lauded. This continued in 2017 which saw quarterly GDP growth of 1.2%, 0.6%, 0.9% and 0.7% giving the impression that it had returned to what had in the past been regarded as normal service. However before the trade war was a glint in President Trump’s eye and indeed before the ECB QE programme stopped things changed. As I have pointed out previously we did not know this at the time because it is only after more recent revisions that we knew 2018 opened with 0.1% and then 0.4% rather changing the theme and meaning that the subsequent -0.1% would have been less of a shock. We can put the whole situation in perspective by noting that German GDP was 106.04 at the end of 2017 and was 107.03 at the end of the third quarter this year. As Talking Heads would put it.

We’re on a road to nowhere
Come on inside
Taking that ride to nowhere
We’ll take that ride

Industrial Production

This has been a troubled area for some time as regular readers will be aware. Throughout it we have seen many in social media claim that in the detail they can see reasons for an improvement, whereas in fact things have headed further south. This morning has produced another really bad number. .

WIESBADEN – In October 2019, production in industry was down by 1.7% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In September 2019, the corrected figure shows a decrease of 0.6% from August 2019, thus confirming the provisional result published in the previous month.

If we look at the breakdown we see that the future is not bright according to those producing capital goods.

Within industry, the production of intermediate goods increased by 1.0% and the production of consumer goods by 0.3%. The production of capital goods showed a decrease by 4.4%. Outside industry, energy production was up by 2.3% in October 2019 and the production in construction decreased by 2.8%.

There is a flicker of hope from intermediate goods but consumer goods fell. There is an additional dampener from the construction data as well.

Moving to the index we see that the index set at 100 in 2015 is at 99.4 so we are seeing a decline especially compared to the peak of 107.8 in May last year. If we exclude construction from the data set the position is even worse as the index is at 97.6.

The annual comparison just compounds the gloom.

-5.3% on the same month a year earlier (price and calendar adjusted)

Looking Ahead

Yesterday also saw bad news on the orders front.

WIESBADEN – Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in October 2019 a seasonally and calendar adjusted 0.4% on the previous month.

This was a contrast to a hint of an uptick in the previous month.

For September 2019, revision of the preliminary outcome resulted in an increase of 1.5% compared with August 2019 (provisional: +1.3%).

If we peer into the October detail we see that this time around the problem was domestic rather than external.

Domestic orders decreased by 3.2% and foreign orders rose 1.5% in October 2019 on the previous month. New orders from the euro area were up 11.1%, new orders from other countries decreased 4.1% compared to September 2019.

The oddity here is the surge in orders from the rest of the Euro area when we are expecting economic growth there to be very flat. If we switch to Monday’s Markit PMI then there was no sign of anything like it.

At the aggregate eurozone level, ongoing declines in
output and new orders were again recorded.

Indeed ICIS reported this in October based on the Markit survey.

Sharp declines in order book volumes weighed on operating conditions during the month, concentrated on intermediate goods producers, while consumer goods makers saw significantly milder levels of deterioration.

If we look back we see that this series has turned out to be a very good leading indicator as the peak was in November 2017 at 108.9 where 2015 = 100. Also we see that in fact it is domestic orders which have slumped the most arguing a bit against the claim that all of this is trade war driven.

The annual picture is below.

-5.5% on the same month a year earlier (price and calendar adjusted)

Monetary Policy

This has remained extraordinarily easy but does not appear to have made any difference at all. The turn in production took place when ECB QE was still going full steam ahead for example. Indeed even those who voted for such measures seem to have lost the faith as this from yesterday’s twitter output from former Vice-president Vitor Constancio suggests.

In 2014 when the main policy rate reached zero, keeping a corridor implied a negative deposit rate. There was then a risk of deflation and it was supposed to be a temporary tool.Since last year I have been tweeting against going to deeper negative rates.

A welcome realisation but it is too late for him to change policy now.

The problem for monetary policy is that with the German ten-year yield being -0.3% and the official deposit rate being -0.5% what more can be done? It all has the feeling of the famous phrase from Newt in the film Aliens.

It wont make any difference

Fiscal Policy

The policy was explained by Reuters in late October.

Eurostat said Germany’s revenues last year exceeded expenses by more than previously estimated, allowing Berlin to post a budget surplus of 1.9% of its output, above the 1.7% that Eurostat had calculated in April.

That has been the state of play for several years now and the spending increases for next year may not change that much.

The total German state budget for next year is to be €362 billion ($399 billion), €5.6 billion more than is being spent this year. ( DW )

Although further down in the article it seems that the change may be somewhat limited.

As in previous years, and following the example of his conservative predecessor, the Social Democrat Finance Minister Scholz has pledged not to take on any more debt – maintaining Germany’s commitment to the so-called “black zero”: a balanced budget.

Some more spending may have an implicit effect on the industrial production numbers. Indeed defence spending can have a direct impact should orders by forthcoming for new frigates or tanks.

Yesterday FAZ reported that this fiscal year was more or less the same as the last.

German state is facing a significant surplus this year. All in all, revenues will exceed spending by around 50 billion euros. This is apparent from an internal template for the Stability Council meeting on 13 December. It contains the information on the state’s net lending of between € 49.5 and 56.5 billion.


There is a case here of living by the sword and perhaps then dying by it as it is what has been considered a great success for Germany which has hit the buffers last year then this. The manufacturing sector is around 23% of the economy and so the production figures have a large impact. October is only the first month of three but such weak numbers for an important area pose a question for GDP in the quarter as a whole? Rather awkwardly pay rates seem to have risen into the decline.

The third quarter saw an exceptionally strong
increase in negotiated pay rates. Including additional benefits, these rates rose year-on-year
by 4.2% in the third quarter of 2019, compared
with 2.1% in 2018. This temporary, considerably higher growth rate was mainly due to new
special payments in the metal-working and
electrical engineering industries, which had
been agreed last year and were first due in July

Before we knew the more recent data the Bundesbank was telling us this.

The slowdown of the German economy will
probably continue in the fourth quarter of
2019. However, it is not likely to intensify markedly. As things currently stand, overall economic output could more or less stagnate.
Thus, the economy would largely tread water
again in the second half of this year as a whole.

Then they left what is now looking like a hostage to fortune.

However, from today’s vantage point, there is
no reason to fear that Germany will slide into recession.



10 thoughts on “Is the Bundesbank still sure that Germany is not facing a recession?

  1. Hi Shaun,

    Thanks for your enlightening blog.

    Sorry to ask a question unrelated to this post.. I came across the term “Hedonic Quality Adjustments” lately and bit of googling revealed that UK started using it in 2003. I feel this adjustment makes the inflation statistics a lot more incomprehensible to the common man. Personally I feel there is much less transparency in the measurement and figures in the presence of this adjustment.

    Is there a way of finding out what is the “Hedonic quality adjustment” factor used in each inflation figure after 2003? And is there a way to workout/find out (if published) what the inflation would have been in the absence of the adjustment?

    Is this used in both CPI and RPI?

    • Hi Eternal Optimist
      For those wondering the UK ONS defines it thus.

      ” hedonic quality adjustment, which uses regression techniques to relate the price of an item to its measurable characteristics. For computers, the measurable characteristics may include the speed of the processor, the size of the hard disk or the amount of memory. Hedonic regression is often considered the preferred method for quality adjusting price indices, especially for Information and Technology Communication (ICT) products, although this view is not without its critics.”

      Indeed.There is a hint as to what it is applied to above but for the UK we were told this in 2014.

      “Hedonic quality adjustment was first introduced in the Consumer Prices Index (CPI) in 2003 for PCs. Since then the use of hedonics has expanded in UK consumer price statistics to include a further five technology products; digital cameras, laptops, pay-as-you-go (PAYG) mobile phone handsets and PAYG smartphone handsets (hereon referred to as mobile phones and smartphones), and tablet PCs”

      The impact is as follows.

      “In 2013 the combined weight of all hedonic items in the CPI was 0.73 per cent (or 7.30 parts per 1000), which has fallen from a high of almost 1 per cent in 2007, despite the subsequent introduction of smartphones and tablet PCs”

      As to your first question the data must exist but I do not believe it is in the public domain and to your second it was CPI first but RPI quickly followed.

      • Thanks for explaining this. As it affects only 0.73 percent of items in the basket, probably good to conclude if doesn’t affect the inflation figure.

    • Hi Chris

      According to VW may have a new problem.

      “Prosecutors in Germany raided VW headquarters, reportedly looking for information on the EA288 engine. In simulations, the engine was found not to indicate properly when its diesel filter fails.
      The engine is successor to the EA189 engine that was involved in Dieselgate, a scandal over rigged emissions testing that first became public in 2015.
      It’s the headache that keeps on giving, but this time apparently individual VW employees are the target, not the company as a whole.”

      Not quite deja vu but nearly

      The whole issue must have affected the image of German manufacturing which traded a lot on an image of quality.But measuring it is almost impossible I think.

  2. Hello Shaun,

    re: “Since last year I have been tweeting against going to deeper negative rates.”

    well he is correct in that you’ll see a hysteresis effect . once they get anywhere near -2% things could rapidly change – a bank run effectively.

    Anything like that anywhere near the high street and we’ll find the ATM empty and the Banks closed for days if not weeks .

    Yah, People will want to have their money returned , not a return on their money !

    Of course a warning red flag would be the removal of Bank notes , starting with high denomination ones ……. ( already done ??)


    • Hi Forbin

      I took a look at this when I went through the money supply figures for the Euro area at the end of last month.

      “The ECB is supposed to be against such criminal activity and has used that reason in its ending of production of 500 Euro notes.The circulation of them is in a gentle decline and there are now 458 million of them. The numbers of 200 Euro notes has shot higher as there were 253 million a year ago as opposed to 366 million ( and rising) now.”

      So the tectonic plates are shifting and over 22 billion Euros worth of extra 200 Euro notes is a tidy sum but there is a long way to go to get rid of the 500 Euro note.

  3. “This has remained extraordinarily easy but does not appear to have made any difference at all.”

    I know the counterfactual – it would have been worse – but we’ve seen ‘foot-to-the-floorboards’ monetary policy on an international scale for over a decade, Shaun,. I’ve yet to see any narrative that justifies removing the floorboards. If ZIRP hasn’t made things worse, why would NIRP make things better.?

    And still no-one asks why the engine isn’t overheating and why the vehicle hardly moves!
    Or perhaps TPTB are too afraid to ask.

    • Hi Eric

      Maybe the Queen of Hearts was right.

      “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

      Also perhaps the central bankers read this bit.

      “In another moment down went Alice after it, never once considering how in the world she was to get out again.”

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