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.

Comment

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
2019.

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.

 

 

Negative interest-rates are on the march yet again

A feature of the modern era is that things which are permanent are described as “temporary”. This has been particularly true in the era of interest-rates as it is easy to forget now that the low interest-rates of 2009/10 were supposed to be so. The reality is that they went even lower and in more than a few places went negative which again was supposed to be temporary. But the list got longer along the lines of the famous Elvis Presley song.

We’re caught in a trap
I can’t walk out
Because I love you too much baby

I have written before that I think that there are two factors in this being passed onto the ordinary depositor. Firstly how negative interest-rates become and secondly how long they are negative for. The reason why there is any delay in the pass on to depositors and savers is that the banks are afraid they will withdraw their cash and hence break their business model apart.

Germany

On the 19th of last month we noted that some German banks were looking to spread the negativity net wider and according to Bloomberg some smaller ones have broken ranks.

After five years of negative rates imposed by the European Central Bank, German lenders are breaking the last taboo: Charging retail clients for their savings starting with very first euro in the their accounts.

While many banks have been passing on negative rates to retail clients for some time, they have typically only done so for deposits of 100,000 euros ($111,000) or more. That is changing, with one small lender close to Munich planning to impose a rate of minus 0.5% to all savings in certain new accounts. Another bank in the east of the country has introduced a similar policy and a third is considering an even higher charge.

This is the system we have some to expect where a small bank or two is used as a pathfinder to test the water. I wonder if there is some sort of arrangement here although this from Bloomberg is also true.

 While there are some exemptions under the policy, years of sub-par profitability have left especially smaller lenders with few options to offset the cost of the ECB’s charges.

The irony is not lost on me that policies brought in to protect “The Precious” are now damaging it and may yet destroy it. I also find it fascinating to whom Bloomberg went for an opinion as it is straight out of the European equivalent of Yes Prime Minister.

“For now, negative rates are probably a signal to new clients that a bank doesn’t need any additional deposits,” said Isabel Schnabel, a professor at the University of Bonn who was nominated by Germany to join the ECB’s Executive Board. “I would assume that banks are a lot more cautious with existing customers.”

Kylie Minogues “Spinning Around” should be playing in the background to that. Still Isabel should fit in well with the ECB Executive Board as we get some strong hints as to why she was nominated.

Who is it?

The banks are shown below.

Now Volksbank Raiffeisenbank Fuerstenfeldbruck, a regional bank close to Munich, is among the first brushing off such concerns. The bank says it will impose a negative rate of 0.5% on new clients who open a popular form of saving account……….Kreissparkasse Stendal, in the east of the country, has a similar policy for clients who have no other relationship with the bank. Both lenders levy the charges on new customers who open a type of savings account that allows for daily, unlimited withdrawals, a popular instrument among German savers. Existing customers are mostly exempt for now.

The way that this has been such a slow process shows that the banks are afraid of deposit flight or a type of run on the bank. So far we do not know when that would occur although we do know now that some versions of negative interest-rates do not cause it. As the plan below is for an extra -0.05% it seems unlikely to be the trigger.

Frankfurter Volksbank, one of the country’s largest cooperative lenders, is considering going even further and charging some new customers 0.55% for all their deposits, Frankfurter Allgemeine Zeitung reported, without saying where it got the information. The lender said in a statement it has not made any decisions yet.

Denmark

The Straits Times has picked up on an interview by the Governor of the central bank Lars Rhode and it is rather revealing.

In Denmark, where banks have lived with negative rates since 2012, it’s now clear that life below zero isn’t about to end any time soon. People need to understand that it’s “lower for longer”, Rohde said. And that will “definitely” have negative consequences for lenders, he said.

He also gave a speech yesterday and in it there was this.

Digitalisation and new legislation give more players access to the market for bank products. From the payments market we know that digital solutions have a tendency to create natural monopolies because it costs less to perform one extra transaction once the digital infrastructure is in
place.

That was ominous as banks already have problems with their business model and it got worse as he told them who he had in mind.

In recent years, we have seen tech giants, such as Apple and Amazon, enter the financial market. Experience from both the USA and China shows that these firms are extending their original core business to include payments and subsequently also financial services such as
lending.

Is he telling them they are obsolete and dinosaurs. Still he did manage some humour.

Well-functioning IT systems and a tight rein on costs will be key competitive parameters for banks in the coming years.

As the Straits Times puts it.

But years of negative rates, tougher regulatory requirements and, in some cases, out of date technology, have put some banks on the back foot.

Indeed this may put a chill down bankers spines.

According to a report in Borsen on Tuesday, Apple Pay has now established itself as a considerably more popular app among Danish shop owners than a local mobile payment solution offered by Nets A/S, which has so far dominated digital payments within the Nordic region.

So far Danish banks are resisting the trend towards negative interest-rates for all.

For now, lenders have drawn the line at 750,000 kroner (S$152,000), which is the threshold below which deposits are covered by guarantees.

Comment

There is a steady drip drip here and there is some other news which suggests to me that the ECB may be genuinely afraid. In its latest round of monetary easing there was also tiering of deposits for banks at the ECB itself which may reduce the costs there by a third. But in the last week or two there are signs of something more subtle regarding bank capital.

Enter Mr Enria new head of the SSM… And Unicredit’ s new business plan presented this morning. In which they make clear that Pillar 2 would be CET1 AT1 and T2. This means in practice :

A) a big CET1 relief for banks (80bps for Unicredit)

B) a massive need of new AT1/T2

( @jeuasommenulle )

He thinks that today’s announcement from Unicredit of Italy hints that the capital requirements for risk-weighted assets are being trimmed. There has been a change in who is in charge and more flexibility seems to be in the offing. This adds to the hint provided last week in the proposed banking merger between Unicaja and Liberbank as in the past it might have been stymied by a demand for more capital. Oh and SSM is Single Supervisory Mechanism.

This echoes partly because of this if we return to the Governor of the Danish central bank.

This creates an underlying need for consolidation, also within the financial sector.

So it is a complex picture and remember some policymakers at the ECB wanted to turn the screw even harder with a Deposit Rate of -0.6%.

 

 

Germany escapes recession for now but what happens next?

This morning has brought the economics equivalent of a cliffhanger as we waiting to see if Germany was now in recession or had dodged it. The numbers were always going to be tight. so without further ado let me hand you over to Destatis.

WIESBADEN – In the third quarter of 2019, the price-adjusted gross domestic product in Germany increased by 0.1% on the second quarter of 2019, after adjustment for seasonal and calendar variations.

So Germany has avoided what has become called the technical definition of recession which is two quarters of contraction in a row. However there was a catch.

According to the most recent calculations, taking into account newly available statistical information, the GDP was down 0.2% in the second quarter of 2019, which is 0.1 percentage points more than first published.

So like the UK the German economy shrank by 0.2% in the second quarter which means that over the half-year the economy was 0.1% smaller. Putting it another way the economy was at 107.20 at the end of the first quarter and at 107.03 at the end of the third quarter.

Just to add to the statistical party the first quarter saw growth revised higher to 0.5% so we have a pattern similar to the UK just weaker. As to the detail for the latest quarter we are told this.

positive contributions in the third quarter of 2019 mainly came from consumption, according to provisional calculations. Compared with the second quarter of 2019, household final consumption expenditure increased, and so did government final consumption expenditure. Exports rose, while imports remained roughly at the level of the previous quarter. Also, gross fixed capital formation in construction was up on the previous quarter. Gross fixed capital formation in machinery and equipment, however, was lower than in the previous quarter.

As you can see it was consumption which did the job which was presumably driven by the employment figures which remain strong.

Compared with September 2018, the number of persons in employment increased by 0.7% (+327,000). The year-on-year change rate had been 1.2% in December 2018, 1.1% in January 2019 and 0.8% in August 2019.

So rising employment albeit at a slowing rate and with it looks as though there has been solid real wage growth too.

 In calendar adjusted terms, the costs of gross earnings in the second quarter of 2019 rose by 3.2% year on year,

At that point inflation had slowed to 1.5% so as far as we know there has been both employment and real wage growth. So we might have expected consumption growth to be higher than it has been.

We are in awkward territory with the mention of exports because they do not count in the output version of GDP as they are sales hence they go in the expenditure version. So we look at production for overseas sales which is problematic as shown below.

Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports increased by 4.6% and imports by 2.3% in September 2019 year on year. After calendar and seasonal adjustment, exports were up 1.5% and imports 1.3% compared with August 2019.

But whilst that is good GDP counts this.

In September 2019, production in industry was down by 0.6% on the previous month and -4.3% on the same month a year earlier (price and calendar adjusted)

Now production is not the only source for exports as services are not in it but services will have had to had been booming so we need more information I think.

Statistical Humility

The analysis of GDP numbers to 0.1% is something I have warned about before. Let me illustrate with this from Sweden Statistics earlier.

Statistics Sweden is publishing revised statistics on the Labour Force Surveys (LFS) for the period July 2018 to September 2019, in which only half of the sample is used, due to an earlier identification of quality deficiencies……..this increases the uncertainty, particularly at a more disaggregated level.

You can say that again! Or to put it another way the unemployment rate of 7.4% in September is now reported as 6.6%. Now we all make mistakes and honesty is the best policy but an error of this size begs so many questions. It reminds me of the mistake made in Japan over the measurement of real wages which was in the same direction although of course had the opposite implication for the economy.

Whilst neither example was about GDP the same principles hold and in the case of Sweden I think the mistake is worse because unemployment is a much simpler concept.

Looking Ahead

This could not have been much more negative.

Business confidence across the German private sector
has slipped to the lowest since the global financial crisis,
according to the latest IHS Markit Global Business
Outlook survey. Output of goods and services is on
average expected to fall slightly over the next 12 months,
while firms have signalled their intention to cut
workforce numbers for the first time in ten years.
Concerns about future profits are meanwhile reflected
in a negative outlook for capital spending (capex).

Now Markit have not had a good run on Germany as they have signalled growth when there has not been any so I am not sure where this takes us? Where there might be some traction is in this bit as we have noted already that employment growth is slowing.

now these latest figures point to private sector workforce numbers actually falling over the coming year.

As to other areas the example is mixed. For now the news seems bad and you will have probably guessed the area.

“By the end of 2022, Mercedes-Benz Cars plans to save more than 1 billion euros in personnel costs. To this end, jobs are to be reduced,” the company said in a statement.

“The expanded range of plug-in hybrids and all-electric vehicles is leading to cost increases that will have a negative impact on Mercedes-Benz Cars’ return on sales,” it added. ( thelocal.de )

Looking further ahead there is potentially some better news on the horizon.

Tesla’s chief executive, Elon Musk, has said Berlin will be the site of its first major European factory as the carmaker’s expansion plans power ahead.

“Berlin rocks,” Mr Musk said, adding Tesla would build an engineering and design centre in the German capital.

Tesla previously said it aimed to start production in Europe in 2021.

The moves come as the firm, which has also invested heavily in a Chinese factory, faces intensifying competition in the electric vehicle industry.

Comment

Let me start with this just released by the Financial Times.

Learning to love negative interest rates……..As evidence accumulates the naysayers case becomes less convincing.

So Germany should be booming right? After all it not only has an official deposit rate of -0.5% but it also has a benchmark bond yield of -0.3%. Yet the economy had a burst of growth and has now pretty much stagnated for a year. So actually it is the case for negative interest-rates which has got weaker. No doubt more of the same “medicine” will be prescribed.

We find ourselves observing what has become a two-speed economy where the services sector is struggling to make up for the declines in the manufacturing sector or if you like they are turning British. There are deeper questions here as for example how much manufacturing will remain in the West?

Also the money supply situation which has been helpful so far in 2019 may be turning lower for the Euro area as a whole.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 7.9% in September from 8.5% in August.

So for now there is not much sign of a turn for the better and if we stick to annual GDP growth as our measure that will be focused on the first quarter next year as there is a 0.5% reading to be replaced.  Germany must have its fingers crossed for the end of the trade war.

The Investing Channel

 

 

Germany has become a weak link for the Euro area economy

This morning has focused our minds again on what has been one of the economic developments of the past eighteen months or so. This is the turn in the trajectory of the German economy which has gone from being what the Shangri-Las would call the leader of the pack to not only a laggard but maybe contracting. So let us get straight to the news,

The German economy contracted in September,
latest flash PMI data showed, as the downturn in
manufacturing deepened and service sector growth
lost momentum. Job creation meanwhile stalled as
firms reported weakening demand and pessimism
towards the outlook for activity. ( Markit PMI )

Manufacturing

If we start with this area then we have to address the fact that things were already really bad so that gives a perspective on the state of play. If we thought the worst was behind us then how about this?

September’s IHS Markit Flash Germany
Manufacturing PMI read 41.4, signalling the
sharpest decline in business conditions across the
goods-producing sector since the depths of the
global financial crisis in mid-2009. ( Markit)

The only time I can recall a series weaker than this was the Greek manufacturing sector which I recall going into the mid-30s back in the day as the economy collapsed, or if you prefer was rescued. I am sure that some there are having a grim smile at this turn of events although of course it will have side-effects for my subject of Friday.

The survey also tries to look ahead but that raises little hope and even adds to the gloom.

The survey showed a sustained decline in underlying
demand, with total inflows of new business falling
for the third month running and at the quickest rate
for seven years. Slumping manufacturing orders led
the decline, recording the steepest drop in more than
a decade in September,

If we switch to the official data we were told this earlier this month.

In July 2019, production in industry was down by 0.6% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In June 2019, the corrected figure shows an decrease of 1.1% (primary -1.5%) from May 2019.

As you can see there June was not as bad as thought only for the number to fall again in July meaning we can get some perspective from this.

-4.2% on the same month a year earlier (price and calendar adjusted)

This means that the index for industrial production is at 101.2 where 2015 = 100 which shows little growth and if we drop construction out of the numbers it falls to 99.5. So in broad terms what Talking Heads would call a road to nowhere. More specifically the seasonally and calendar adjusted figures peaked at 107.2 in May of 2018.

Also we see that the PMI numbers we looked at above are pretty consistent with the official orders data.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in July 2019 a seasonally and calendar adjusted 2.7% on the previous month…….

-5.6% on the same month a year earlier (price and calendar adjusted).

Services

This has been doing much better than the manufacturing sector. But we already know from the numbers above that it has not pulled the manufacturing sector higher so the troubling question is whether it pulled the service sector down?

Growth of business activity in the service sector
slowed sharply since August to one of the weakest
rates seen over the past three years……..Flash Germany Services PMI Activity Index at
52.5 (Aug: 54.8). 9-month low.

Sadly the answer is yes.

though notably there was also a drop in service sector new business – the first recorded since December 2014.

You may not be surprised to learn that much of the trouble is coming from abroad.

Lower demand from abroad also remained a key factor, with both manufacturers and service providers reporting notable decreases in new export orders during the month.

Bringing everything together brought a new development for the Markit PMI series.

“Another month, another set of gloomy PMI figures
for Germany, this time showing the headline
Composite Output Index at its lowest since October
2012 and firmly in contraction territory.
“The economy is limping towards the final quarter of
the year and, on its current trajectory, might not see
any growth before the end of 2019″

That is significant for them as they have been over optimistic for Germany throughout this phase. They have recorded growth when the official data has showed a contraction. Also if we look back to the opening of last year they gave us numbers in the high 50s showing very strong growth whereas as I pointed out on the 20th of last month the reality was this.

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%).

In some ways it is harsh to point this out because the official data series was wrong too but the PMIs were also more optimistic than what we thought the numbers were then, and sadly were overall simply misleading.

Bonds

There has been an impact here this morning as Germany’s bond market has resumed its rally. The picture had been weaker for a while in an example of buy the rumour and sell the fact on ECB ( European Central Bank ) action. But today the ten-year yield has fallen to -0.58% and the whole curve has gone negative again with the thirty-year at -0.12%.So Germany is being paid to borrow at every maturity.

Comment

There are more than a few questions here and the Ivory Tower of the ECB has been instructed to look into the situation. From a Working Paper released this morning.

In the period from January 2018 to June 2019 the year-on-year growth rate of euro area industrial production (excluding construction) fell by 6.3 percentage points overall, from 3.9% to -2.4%. This is by far the largest fall recorded among major economies in that period……Among the largest euro area countries, the biggest declines were recorded by Germany (10.9 percentage points), the Netherlands (5.7 percentage points) and Italy (5.5 percentage points).

In a broad sweep what has been a long-running success for the Euro area which has been German production leading to the trade surplus has stalled and hit the brakes. Or as Markit put it.

The automotive sector was once again highlighted as a particular source of weakness.

As to the ECB it is looking rather impotent here. It has made its move with even lower interest-rates ( -0.5%) and more bond buying or QE but it was doing that when the German economy turned down at the opening of 2018. Also the hype about the new TLTRO and the issue of tiering for The Precious collapsed as the take-up was a mere 3.4 billion Euros.

Of course Germany could respond with fiscal policy. Here the outlook is bright as it has and is running a fiscal surplus and it would be paid to borrow. Yet it shows little or no sign of doing so. From time to time a kite is flown like the current one about more spending on renewable energy but then the wind stops blowing and the kite falls to the ground.

Meanwhile this morning’s monthly report from the Bundesbank seems rather extraordinary.

Moreover, from today’s vantage point, only a slight decline in GDP is to be expected overall, even including the second quarter. “Such a decline should currently be seen as part of a cyclical return to normality as the German economy emerges from a period of overheating,” according to the experts.

Podcast

 

 

 

 

 

 

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?

 

 

 

 

Why does Germany have such negative bond yields?

Much is happening in the economy of Germany right now and let me open with a perspective provided by when we looked at it on the 6th of June.

If we look towards Europe we see that the Federal Republic of Germany has set a new record for itself this morning as its benchmark ten-year bond yield has fallen to -0.23%. So it is being paid ever more to borrow which I will let sink in for a moment.

At the time that provided some shock value as in the previous wave of negative bond yields we had seen the shorter maturities go negative but this time the benchmark ten-year had joined the party. However the bond market surge continued and as I type this the German ten-year yield is -0.4%. There are various factors in this but the German statistics office has provided a significant one already today.

The debt owed by the overall public budget  to the non-public sector  amounted to 1,916.6 billion euros at the end of 2018. This represents a per capita debt of 23,124 euros in Germany. Based on final results, the Federal Statistical Office (Destatis) also reports that debt decreased by 2.7% (52.5 billion euros) compared with the revised results as at 31 December 2017.

This provides a perspective on the French debt numbers we looked at yesterday and whilst the basis is slightly different the broad picture holds. In fact the two countries are heading in different directions as this from back in April highlights.

According to provisional results of quarterly cash statistics, the core and extra budgets of the overall public budget – as defined in public finance statistics – recorded a financial surplus of 53.6 billion euros in 2018.

In fact looking at the annual data release Germany has been reducing its debt since 2015.

The next factor is the expected policy of the European Central Bank which already holds some 517 billion of German bonds or bunds and is expected to announce new purchases in September. The impact on the German bond market is higher because the ECB makes its purchases according to a Capital Key based on economic performance.

Five-yearly adjustment based on population and GDP data from European Commission.

Here Germany is strong getting 26.4% of the total and hence the QE bond purchases. But its bond market is relatively small due to the way it runs its public finances and according to its statisticians it has a securities debt ( bonds and treasury bills) of 1.521 trillion Euros and falling. In fact as the ECB has been buying the debt total has fallen by 51 billion Euros. If you want the price of something to rise then large purchases ( ECB) accompanied by falling and at times negative supply is the way to do it.

This creates quite a mess because you have a negative yield and thus an expected loss if you hold to maturity. Yet holders of German bonds have made large capital gains as for example the German bond future is up over 3 points since we looked at it on June 6th. Of course you are replacing guaranteed coupons with the “greater fool” theory but then that twists as we note the greater fool is often the central bank.

The Economy

This morning has brought more evidence of a slowing economy.

Compared with June 2018, the number of persons in employment increased by 0.9% (+394,000). The year-on-year change rate had been 1.2% in December 2018, 1.1% in January 2019 and 1.0% in April. This means that employment growth slightly slowed in the course of 2019.

As you can see employment growth is slowing and June saw a rise of a mere 1,000 on a monthly basis which if adjusted for seasonality rises to 7,000 as opposed to the 44,000 average of the last five years.

If we switch to unemployment Reuters is reporting this.

German unemployment increased less than expected in July, data showed on Wednesday, suggesting that the labor market in Europe’s largest economy so far remains relatively immune to an economic downturn which is driven by a manufacturing crisis. Data from the Federal Labour Office showed the number of people out of work rose by 1,000 to 2.283 million in seasonally adjusted terms. That compared with the Reuters consensus forecast for a rise of 2,000.

I love the way that Reuters think you can accurately forecast unemployment to 1000! The broad view is that on this measure the decline in unemployment looks as if it may have stopped. This is backed up by this bit.

The jobless rate held steady at 5.0% – slightly above the record-low of 4.9% reached earlier this year.

If we switch to retail sales then the story starts well.

+3.5% on the previous month (in real terms, calendar and seasonally adjusted, provisional)

That was the best since 2001 on a monthly basis but then we also got this.

-1.6% on the same month a year earlier (in real terms, provisional)

This was partly driven by a large downwards revision to the May data which reminds us of how erratic retail sales numbers can be. Anyway so far this year the retail numbers have been helping to keep Germany going.

Compared with the previous year, turnover in retail trade was in the first six months of 2019 in real terms 2.2% and in nominal terms 2.9% higher than in the corresponding period of the previous year.

But if yesterday’s survey is any guide the times they are a-changing.

The GfK consumer sentiment indicator, based on a survey of about 2,000 Germans, edged down to 9.7 from 9.8 a month earlier. It was the lowest reading since April 2017 and in line with market expectations……….The GfK sub-indicator measuring consumers’ economic expectations dropped to -3.7, falling below its average of zero points for the first time since March 2016 and hitting the lowest level since November 2015. ( Reuters )

Economic Growth

This morning has brought the economic growth numbers for the Euro area.

Seasonally adjusted GDP rose by 0.2% in both the euro area (EA19) and the EU28 during the second quarter of
2019, compared with the previous quarter…….Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.1% in the euro area and
by 1.3% in the EU28 in the second quarter of 2019. In the previous quarter, GDP had grown by 1.2% in the euro
area and by 1.6% in the EU28.

We do not have the German numbers but there are more than a few clues from this. For example we looked at France ( 0.2%) yesterday and we know Austria was 0.4% and Spain 0.5%. By the time you read this you will know how much Italy contributed to the reduction in growth at which point we will know if the Bundesbank was right to suggest that the German economy may have contracted this quarter.

Comment

What we are seeing is the economic and financial market version of a perfect storm. A large buyer enters a market just as supply reduces and then net supply goes into reverse. Next we see an economic slow down which surprisingly at these levels retains the old knee-jerk effect of people buying bonds. However this time around that is not driven by the security of coupons as some bonds now don’t have them or yield because it is usually negative but instead the prospect of being able to sell at ever higher prices to the central bank. So it looks the same on the surface but is different as we look deeper.

Meanwhile we do not often get comparisons of this sort so here it is and as it is missing the UK is the same as France,

 

 

 

What to do with a problem like Germany? Cut interest-rates further….

Over the past year there has been something of a sea change for the economy of Germany. After a period of what in these times was strong economic growth the engine of the Euro area has stuttered and coughed. If we look at it in annual terms economic growth went from the 2.2% of 2016 and 2017 to 1.4% last year and the latter was the story of two halves as the second half saw the economic contract in the third quarter and flat line in the fourth. This fits with our subject of yesterday Deutsche Bank which has seen its share price fall by 36% over the past year as both it and its home economy have struggled. Oh and that new bad bank plan rallied the share price for a day and a bit as it is back to 6.03 Euros. So it looks like another new plan is singing along with Queen.

Another one bites the dust
Another one bites the dust
And another one gone, and another one gone
Another one bites the dust.

What Next?

The opening quarter of this year offered some relief as Germany saw the economy grow by 0.4%. However yesterday in its June report the Bundesbank pointed out that it was not convinced that this represented a genuine turn for the better. 

Special effects that contributed to a noticeable rise in gross domestic product in the first quarter are either expiring or being reversed.

Google Translate is a little clunky here but we see that it feels that the construction industry will not have boosted the economy.

So is the construction industry on a quarterly average with certain Rebound effects. Due to weather conditions, construction activity had widened considerably in the winter months.

Also it feels that the ongoing problems with sales of diesel engined cars which we see pretty much everywhere we look will impact again after flattering things as 2019 opened.

Furthermore, due to delivery difficulties as a result of the introduction of the new emissions test procedure WLTP (Worldwide Harmonized Light Vehicles Test Procedure) last fall. Deferred car purchases have been made up for the most part.

It notes that the industrial production sector had a rough April.

Industrial production decreased in the April 2019 strongly. In seasonally adjusted account it fell below the previous month’s level by 2½%. As a result, industrial production also fell sharply compared to the mean of the winter months (- 2%).

Do the business surveys back this up?

If we start with construction then here is the latest from Markit.

After a solid performance in early-spring, the German
construction sector continued to lose momentum during May, recording its weakest rise in total activity for four months……It’s been a largely positive start to the year for the sector, but a first fall in new orders in nine months points to some downside risks to the short-term outlook.

So broadly yes and maybe further slowing is ahead. 

However as we look wider Markit is more optimistic than the Bundesbank.

The Composite Output Index continued to point to a modest
pace of growth across Germany’s private sector. At 52.6, the latest reading was up from 52.2 in April and the highest in three months, but still below the long-run series average of 53.4 (since 1998).

That is interesting as central banks love to peruse PMI numbers. Mind you perhaps they had advance warning of this released this morning from the ZEW Institute.

The German ZEW headline numbers for June showed that the economic sentiment index arrived at -21.1 versus -5.9 expectations and -2.1 last. While the sub-index current conditions figure jumped to 7.8 versus 6.0 expected and 8.2 booked previously, bettering market expectations. ( FXSTREET )

There is a little irony in the present being better than expected but it is rather swamped by the collapse in expectations. The ZEW is an arcane index that is hard to get a handle on so we should not overstate its significance but the change is eye-catching.

A policy response

I was going to point out that this was going to be an influence on the policy of the European Central Bank or ECB. This comes in two forms as firstly Germany is such a bell weather for the Euro area and according to recently updated ECB capital key is 26.4% of it. Also of course there is the thought that overall ECB policy is basically set for Germany. Thus I was expecting some news or what have become called “sauces” from the ECB summer camp at Sintra which opened last night. This morning we have already learned that President Draghi packed more than his shorts, sun cream and sunglasses.

In this environment, what matters is that monetary policy remains committed to its objective and does not resign itself to too-low inflation.

Here he is setting out his stall and the emphasis is his. There is a clear hint in the way that he is pointing at “too-low inflation” as in the coded language of central bankers it leads to this.

Looking forward, the risk outlook remains tilted to the downside, and indicators for the coming quarters point to lingering softness.

So now not only do we have too-low inflation we have a weak economy too. So if we were a pot on the stove we are now gently simmering. Then Mario turns up the gas.

In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.

First though we have to wait as he continues with the dead duck that is Forward Guidance.

We remain able to enhance our forward guidance by adjusting its bias and its conditionality to account for variations in the adjustment path of inflation.

After all if it worked we would not be here would we? But then we get to boiling point.

This applies to all instruments of our monetary policy stance.

Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools.

And the APP still has considerable headroom.

For newer readers the APP is the Asset Purchase Programme or how it has operated what has become called Quantitative Easing or QE. This is significant because if there is a country which lacks headroom it is our subject of today Germany. This is because it has been running a fiscal surplus and reducing its national debt which combined with the existing ECB purchases means there are not so many to buy these days. Not Italy though as there are plenty of its bonds around.

Finally we get a reinforcement of the theoretical framework with this.

What matters for our policy calibration is our medium-term policy aim: an inflation rate below, but close to, 2%. That aim is symmetric, which means that, if we are to deliver that value of inflation in the medium term, inflation has to be above that level at some time in the future.

Comment

We may have seen the central banking equivalent of what is called a “one-two” in boxing. Yesterday the German Bundesbank talks of an economic contraction and today Mario Draghi is hinting that more easing  is on its way.  What this may mean is that whilst the Bundesbank is unlikely to be leading the charge for easier policy it will not stand in its way. Also if Mario Draghi is going to do this there is not a lot of time left as he departs in October, does he plan to go with a bang?

This has already impacted German financial markets as they look at the newswires and price German bonds even higher. After all if you expect a large buyer why not make them pay for it? So it is now being paid even more to borrow as the benchmark ten-year yield reaches another threshold at -0.3%. Or if you prefer the futures contract has hit all time highs in the 172s.

Of course if the easing worked we would not be here so there is an element of going through the motions about this. Also let’s face it only central bankers and their cheerleaders think low inflation is a bad idea. Sadly the media so rarely challenge them on how they will make people better off via them being poorer.