Germany is facing the credit crunch era version of stagflation

Some days a topic appears that has become an economic theme plus links with the discussions of earlier in the week and today is such a day. Since late summer last year we have began observing some backfires in the engine of the German economy and that turned into a second half of 2018 that saw economic output as measured by Gross Domestic Product actually fall.  This meant that the 2.2% economic growth of 2016 and 2017 decelerated to 1.4% in 2018. Apparently that is enough to turn Germans to drink.

WIESBADEN – As reported by the Federal Statistical Office, the beer producing and storing establishments in Germany sold 2.0 billion litres of beer in the first quarter of 2019. That was an increase of 2.4% from the corresponding period of the previous year.

However that report from earlier failed to provide enough support for the retail sales numbers.

Retail turnover, March 2019
-0.2% on the previous month (in real terms, calendar and seasonally adjusted, provisional)
-0.5% on the previous month (in nominal terms, calendar and seasonally adjusted, provisional)
-2.1% on the same month a year earlier (in real terms, provisional)
-1.7% on the same month a year earlier (in nominal terms, provisional)

If we concentrate on the real or volume figures we see the retail sales fell by 0.5% on the February numbers and were 2.1% on last year. This would be a troubling development if it persisted because one of the issues of the pre credit crunch era was the German export surplus which we know has if anything grown since. There has been a lot of establishment rhetoric about it but it has been hot air as we sing along with Bob Seeger and the Silver Bullet Band.

Cause you’re still the same
You’re still the same
Moving game to game
Some things never change
You’re still the same.

A proposed win-win situation out of this would be for German domestic consumption to rise and thereby boost imports to reduce the export surplus. This would be a win-win because the imports would be others exports and might lead to a virtuous circle where they could afford more German exports. But the March signal from retail sales is the consumption is not only not booming but maybe falling.

This is a change on what we had seen so far in 2019 and as ever in the retail sales series we wonder about how reliable the seasonal adjustment has been.

The Easter holiday situation had a negative impact on March 2019 sales when compared to March 2018.

Manufacturing

This is an area where the news has progressively gone from bad to worse. This mornings Markit business survey continued the theme.

Latest PMI® data from IHS Markit and BME revealed a further marked contraction of Germany’s manufacturing sector at the start of the second quarter, albeit with the rates of decline in output and new orders easing slightly since March.

Before this phase the phrase “marked contraction” was something definitely not associated with German manufacturing, and especially its up until now very successful car industry.

Behind the decrease in output in April was a seventh straight monthly reduction in new orders. Despite easing slightly since March, the rate of decline remained sharp and quicker than at any other point over the past ten years. This was also the case for new export orders. Where firms reported a decrease in inflows of new work, this was often linked to a slowdown in the automotive industry.

So we see that the automotive slow down is rippling though other parts of industry. Earlier this month Germany’s statisticians focused in on this.

In the course of 2018, however, the production of motor vehicles, trailers and semi-trailers decreased markedly….. the Federal Statistical Office (Destatis) reports that production in the second half of 2018 was a calendar and seasonally adjusted 7.1% lower than in the first half of the year.

They went onto point out that it was 4.7% of the German economy in 2016 and employed 880.000 people directly.

If we look ahead then the outlook also looks none too bright.

Finally, April’s survey showed manufacturers growing
gloomier about the outlook for output over the next 12
months. The degree of pessimism was the greatest seen
since November 2012.

Even this was happening.

another modest decrease in employment

However this just feels like stating the obvious.

Capacity pressures meanwhile continued to dissipate.

Stagflation?

This from Tuesday added a little fuel to the fire.

WIESBADEN – The inflation rate in Germany as measured by the consumer price index is expected to be 2.0% in April 2019. Based on the results available so far, the Federal Statistical Office (Destatis) also reports that the consumer prices are expected to increase by 1.0% on March 2019.

Actually the Euro standard HICP measure or what we in the UK call CPI rose to an annual rate of increase of 2.1%. As to what drove it we see that the annual rate of energy costs has risen from 2.3% in January to 4.6% in March but a larger impact has come from services inflation rising from 1.4% to 2.1% because it is 53% of the index ( These breakdowns are from the German CPI).

As we so often find rental inflation at 1.4% pulls the number lower as it has been 1.4% every month in 2019 so far. Also it is time for my regular reminder that owner-occupied housing costs are ignored.

Given the tight market situation in 2018, prices in Germany as a whole advanced at nearly the same pace as in the preceding years, with house and apartment prices up by an average 8% in the 126 cities. ( Deutsche Bank )

They expect 7.9% this year which will have central bankers rubbing their hands at the wealth effects, after all if you ignore the inflation here it just disappears doesn’t it?

Principally because of low-interest rates, aggregate private household wealth in the entire cycle since 2009 has risen successively by roughly EUR 3,800 bn or over 40%,
according to the Federal Statistical Office, with property asset growth largely paralleling that of financial assets. ( Deutsche Bank)

Also I note that they think that rental inflation for new properties was 5% last year and 4.5% this which begs a question of the official data.

Comment

Whilst comparisons with the stagflation of the 1970s leave us well short of the absolute level of inflation it is also true that wage growth is much lower. The Ivory Towers will need a very cloudy day to avoid spotting that inflation has risen when according to their models it should be falling. So not much growth and some inflation makes us mull that temporarily at least Germany is something of a sick man of Europe.

The irony is that as I reported on Tuesday the pick-up in narrow money growth means that the Euro area has better economic prospects than it did. So other nations look like they will do better than Germany for a while and Spain for example already has been, Thus they may support it and stop things getting as bad as some think. But let me leave you with some manufacturing PMI numbers that this time last year would have been considered as “unpossible”.

Greece 56.6,  UK 53.1,  Germany 44.4

A strong performance for UK GDP but can it last?

Something of a new era in UK Gross Domestic Product or GDP measurement begins as we get a quarterly number after already receiving GDP data for two out of the three months. So in essence we will find out if Meatloaf was right about this.

Now don’t be sad
‘Cause two out of three ain’t bad.

The good news is that the extra two weeks or so mean that more data can be collected and so the quarterly number should be more accurate and less prone to revision. The not so good news is that if we look at the monthly data there are issues which look clear.

The month-on-month growth rate was flat in August 2018. Growth rates in June and July 2018 were both revised up by 0.1 percentage points to 0.2% and 0.4%, respectively.

Does anybody really believe we actually went 0.2% followed by 0.4% and then 0% in monthly terms?

Later we will receive the latest National Institute for Economic and Social Research or NIESR estimate which will be for October so it will be a busy day on the GDP front! Here is where they previously think we stand.

Building on the official data, our monthly GDP Tracker suggests that the economy will expand by 0.7 per cent in the third quarter and by 0.5 per cent in the final quarter of this year. This amounts to a growth rate of 1.5 per cent in 2018 as a whole.  The biggest surprise was from the production sector and, in particular,manufacturing output which expanded by 0.8 per cent. This strength was across the board and the outturn was above our forecast for the same period, partly because of changes to the back data.

If I was to post a challenge to that it would be concerning the rosy scenario for manufacturing when we know that the car/automotive sector has been and continues to struggle. It in my opinion is being hit by the diesel scandal and past stimuli for the sector as if you run a high you have eventually to have a bit of a hangover.

Forecasts

Yesterday we received the forecasts from the European Commission and Pierre Moscovici. If you are in the “bad boys (girls)” club then your punishment is to have your annual growth rate forecast at 1.2% as that was what was provided for the UK and Italy, Frankly that looks optimistic on current trends for the latter. The numbers are rather tight though as the Euro average of 1.9% is pulled higher by some smaller economies. Actually even a little by Greece but care is needed here as Pierre and his predecessors have been forecasting economic growth of 2% per annum since 2012 and therefore through a severe economic depression.

Today’s data

As it is a rare event I do not want to miss the opportunity to praise the Bank of England forecasters who suggested this earlier this month.

UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.6% between Quarter 2 (Apr to June) 2018 and Quarter 3 (July to Sept) 2018.

In one respect it was balanced.

All four sectors of output contributed positively to growth in Quarter 3 2018, with the largest contribution from the services industries at 0.3 percentage points.

If we look deeper we see this.

In the construction industry, output continued to recover following a weak start to 2018, which was in part impacted by the adverse weather. Output increased by 2.1% in Quarter 3 2018 – the fastest increase since Quarter 1 (Jan to Mar) 2017………Output in the production sector rose by 0.8% in Quarter 3 2018, following a decline of 0.8% in Quarter 2 (Apr to June). While output increased across all four main production sectors, around half of total production growth in Quarter 3 was driven by manufacturing……….In the services industries, output growth eased to 0.4% in Quarter 3 2018, contributing 0.3 percentage points to growth in GDP. This is in line with average rates seen since the start of 2017, following the relatively strong growth of 0.6% in Quarter 2 2018.

There are various messages here which have several impacts. Let me start with construction where we are building some new housing.

Q3 compared with Q2 is a rise of £872 million, primarily driven by a £507 million rise in private housing, offsetting the £162 million fall in commercial output. ( h/t @NobleFrancis ).

Then car production to which we will return later.

Transport equipment rose by 2.3% in Quarter 3, reflecting both a bounce back from a 2.7% fall in the previous quarter and strength in UK car exports in Quarter 3.

For once services did not take up all the strain and in fact growth there faded a bit with the sector most in boom, computer programming only rising 4.4% on a year before in spite of a strong quarterly performance of 2.2%.

Rebalancing

It is hard to type that word without thinking of former Bank of England Governor Baron King of Lothbury. The word that is as in fact the reality was much more elusive. However he will be cheering this from the ermine sidelines.

Net trade made the largest positive contribution to GDP growth in Quarter 3 2018 (0.8 percentage points), driven by a 2.7% rise in exports, while imports were flat……….The export growth in Quarter 3 reflects an increase in both goods (4.4%) and services exports (0.8%), with goods exports to non-EU countries growing more robustly than to the EU.

More power to their elbow and it is welcome that this mostly comes from goods exports as we have some detail on them as opposed to services where the numbers are even more of guess. Some of this will fade as we are back to the automotive sector but any ray of sunshine here is good and it was confirmed by the trade data.

The total trade deficit (goods and services) narrowed £3.2 billion to £2.9 billion in the three months to September 2018, due mainly to an improving goods balance.

There was also a bit of hope for wages which would have been included on Baron King’s rebalancing theme if he was thinking ahead.

This was driven by solid growth of 1.3% in compensation of employees (CoE), which contributed 0.6 percentage points to overall growth of nominal GDP.

This section was not all roses as export led growth is usually assumed to come with rising investment but not this time.

The rises in government and private dwelling investment were partially offset by a 1.2% decrease in business investment in Quarter 3. This was the sharpest decline since Quarter 1 2016.

 

Comment

Today’s GDP release shows that the UK economy pretty much reflected the weather in the third quarter of 2018. Not as hot perhaps but pretty good and for once the trade figures boosted it. Compared to our peers it was an especially good quarter as downbeat production data from France and Germany suggested that the 0.2% GDP growth for the Euro area might be revised down to 0.1% as if we look further it was 0.16%. In terms of our debt and deficit metrics it was also a good quarter as we can add in inflation there to get this.

Growth in nominal gross domestic product (GDP) strengthened for the second consecutive quarter in Quarter 3 (July to Sept) 2018, rising by 1.1%.

However there was a building issue which we have observed previously as we return to the automotive sector as promised earlier.

Trade of motor vehicles decreased by 6.2% in September, contributing negative 0.11 percentage points to GDP growth.

This troubled area is likely to further drag on trade and GDP in the fourth quarter, We can bring in the UK’s slowing monetary growth theme as well here to suggest a weaker fourth quarter and if we add in the Euro area’s problems then maybe a much weaker fourth quarter.

The monthly GDP numbers chime in with this theme if we look at them.

Monthly growth was flat in August and September 2018, following a downwardly-revised 0.3% month-on-month growth in July.

Frankly things are not going well for the monthly numbers as they are much too volatile but they too even allowing for that suggest a slowing.

I will be releasing my first weekly podcast this afternoon after the NIESR release as there is a lot to look at their including for example please be nice to any luvvies you see today. I just saw one and missed the chance.

Motion pictures grew by 9.3% in September, making information and communication the biggest contributor to monthly growth. The rise in motion pictures was due to broad-based growth within the sector.

Podcast

Here is the link to my opening podcast.