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.

 

What to do with the problem that is Germany?

Sometimes we find ourselves facing a situation where we have the equivalent of a drumbeat that goes on and on and on. This has been provided by the surge in world bond markets which has a particular headliner. 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.

We can look at this in price terms as the September future peaked at 171.35 earlier today. In itself this provides a perspective because bond contracts are defined around the price being 100, so it has been “Boom! Boom! Boom!” for quite some time for bond investors. More recently there have been ebbs and flows but the present trend started just over three months ago when the future was below 163. For a bond market that is a strong move in such a period so if you have been long then well played to you.

Those who have followed the situation will recall it was considered an issue when the two-year and then five-year yields went negative. So there has been a spread along the maturity spectrum or a type of contagion. It has influenced even the very long term bonds as the thirty-year yield is a mere 0.4%. So pretty much any infrastructure plan looks viable when you can borrow that cheaply.

So let is look at why this is happening?

Germany

The issue regarding the domestic economy was highlighted by the statistics office earlier.

April 2019 (provisional): new orders in manufacturing 
+0.3% on the previous month (price, seasonally and calendar adjusted)
-5.3% on the same month a year earlier (price and calendar adjusted)

What is considered to be the engine of the German economy has been stuttering and it started back in February last year when the growth ended but the real fall began last October when the index was 110.6 ( compared to 2015 at 100) as opposed to the 105.5 of April. Too much precision is dangerous as the numbers are erratic but the detail is not quite what you might expect. Whilst there was a “trade war” effect for a while more recently non-Euro orders have picked up. It has been orders from within the Euro area itself and then declining orders from within Germany that have driven the fall in 2019.

But the economic theme has been of a weak manufacturing sector which has put something of a brake on the overall economy.

The German economy continued to grow at the beginning of the year……The gross domestic product (GDP) increased by 0.4% (after price, seasonal and calendar adjustment) in the first quarter of 2019 compared with the fourth quarter of 2018. The German economic performance last declined slightly in the third quarter of 2018 (-0.2%) and stagnated in the fourth quarter of 2018 (0.0%).

I am not so sure about the “continued to grow” point as it previously stagnated after a contraction. But we get a relevant perspective from this.

+0.7% on the same quarter a year earlier (price and calendar adjusted)

That contrasts with the front page of the statistics office which quotes a 1.4% economic growth rate for 2018. Or the 1.1% growth of the first quarter of 2017 alone.

If we look ahead this week’s business survey from Markit showed that this phase is not yet over.

Business activity in the service sector continues to
grow almost unabated, indicating that domestic
demand conditions remain strong. With the drag from
falling manufacturing production lessening in May,
the Composite Output Index has ticked up, although
it remains in territory historically associated with only
modest growth in GDP.

This was enhanced by this earlier today.

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.

External Events

One way of looking at this is simply to note that the Reserve Bank of India has joined the Reserve Bank of Australia in cutting interest-rates this week as we note this morning’s announcement.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.75 per cent from 6.0 per cent with immediate effect.

That adds to the hint from Jerome Powell of the US Federal Reserve and the 3.2% annualised contraction in the economy of South Africa where sadly the electricity blackouts are taking quite a toll. This has been added to by the Markit business surveys.

Global surveys indicated the weakest pace of economic growth for three years in May, with business optimism down to a survey low……….Global at lowest since 2012 with 13 out of 30 countries now in decline. Germany again reported the steepest downturn but, of the largest countries, the biggest change was seen in the US, where the PMI fell to its lowest since 2009 ( @WilliamsonChris )

So we see something of a rhythm section building up for the world economy and hence bond markets although some seem to be struggling to name that tune.

Despite increased international turmoil and reduced market growth, interest rates in Norway are set to rise going forward……….We have assumed three interest rate hikes of 0.25 percentage points by the end of 2022, the first of which is expected in June this year. The interest rate on credit lines will then rise to 3.6 per cent in 2022.

That was from Norway Statistics earlier who also left me wondering if they realised it is June! Anyway if they do as planned they need not worry any more about a weak Krone.

Official Interest-Rates

The Deposit Rate of the ECB is presently -0.4% and more to the point will have been negative for five years next week. Indeed it is set to last according to official policy.

The Governing Council expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary.

I wonder if we are seeing an impact from a principle highlighted by the band Ace so years ago.

How long has this been going on
How long has this been going on
Well, your friends
With their fancy persuasion
Don’t admit that it’s part of a scheme
But I can’t help but have my suspicion
‘Cause I ain’t quite as dumb as I seem

It may be that the length of the period we have had them for has built up the influence on the bond market.

Comment

There is much to consider here and it has been added to by the announcement of 4000 job losses at Volkswagen as I have been typing this. But as well as the obvious domestic issues where we have been seeing a sort of reverse rebalancing there are other factors at play. As well as the domestic issues there are external ones and let me add one more.

This is the issue of investing in what are considered to be safe assets. Let me quickly point out that safety is a relative term but a German economy where the public finances are being run at a surplus and with a falling national debt has attractions. Putting it another way after the purchases of the ECB ( 519 billion Euros) you can make a case for there being a shortage of German bonds. Hence the price has risen with two categories of buyers. Those with nowhere else to go and international investors happy to accept a running yield loss because they have some combination of fear for events elsewhere and hope for appreciation of the Euro.

But there is a catch because monetary policy in Germany as we have observed is and has been extraordinarily loose. Except the economy has plainly slowed making us wonder if that was it?

D-Day75

Perhaps we need to spare a thought for those landing on the beaches in Normandy all those years ago, including my maternal grandfather. We should also be thanking them and note that sometimes we do not know how lucky we are.

 

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

How is it that even Germany needs an economic stimulus?

Sometimes we have an opportunity like the image of Janus with two heads to look at an event from two different perspectives. This morning’s trade data for Germany is an example of that. If we look at the overall theme of the Euro era then the way that Germany engineered a competitive devaluation by joining with weaker economies in a single currency has been a major factor in this.

According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of 16.3 billion euros in February 2019, which takes into account the balances of trade in goods including supplementary trade items (+19.1 billion euros), services (-1.1 billion euros), primary income (+6.2 billion euros) and secondary income (-7.9 billion euros). In February 2018, the German current account showed a surplus of 19.5 billion euros.

The large surplus which as you can see derives from its trade in goods feels like a permanent feature of economic life as it has been with us for so long. Also it is the bulk of the trade surplus of the Euro area which supports the value of the Euro although if we shift wider the Germany trade surplus is one of the imbalances which led to the credit crunch itself. So let us move on as we note an example of a currency devaluation/depreciation that has been quite a success for Germany.

What about now?

The theme of the last six months or so has shone a different perspective on this as the trade wars and economic slow down of late 2018 and so far this year has led to this.

Germany exported goods to the value of 108.8 billion euros and imported goods to the value of 90.9 billion euros in February 2019……After calendar and seasonal adjustment, exports were down 1.3% and imports 1.6% compared with January 2019.

We can add to that by looking at January and February together and if we do so on a quarterly basis then trade has reduced the German economy by a bit over a billion Euros. Compared to last year the net effect is a bit under four billion Euros.

One factor in this that is not getting much of an airing is the impact of the economic crisis in Turkey. If look at in from a Turkish perspective some 9% of imports come from Germany ( h/t Robin Brooks) and the slump will be impacting even though if we switch to a German view the relative influence is a lot lower.

Production

On Friday we were told this.

+0.7% on the previous month (price, seasonally and calendar adjusted)
-0.4% on the same month a year earlier (price and calendar adjusted)

There was an upwards revision to January and if we look back we see that the overall number peaked at 108.3 last May fell to 103.7 in November and was 105.2 in February if we use 2015 as our benchmark. So there has been a decline and we will find out more next month as March was a fair bit stronger than February last year.

Orders

These give us a potential guide to what is on its way and it does not look good.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in February 2019 a seasonally and calendar adjusted 4.2% on the previous month……..-8.4% on the same month a year earlier (price and calendar adjusted).

If we switch to the index we see that at 110.2 last February was the peak so that is a partial explanation of why the annual fall is so large as for example March was 108.6. But it is also true that this February saw a large dip to the weakest in the series so far at 101. 2 which does not bide well.

Also you will no doubt not be surprised to read that a decline in foreign orders has led to this but you may that it is orders from within the Euro area that have fallen the most. The index here was 121.6 last February as opposed to 104.6 this.

Forecasts

On Thursday CNBC told us this.

Forecasts for German growth were revised significantly downwards in a ‘Joint Economic Forecast’ collated by several prominent German economic research institutes and published Thursday, with economists predicting a meager 0.8% this year.

This is more than one percentage point lower than a prediction for 1.9% made in a joint economic forecast in fall 2018.

Although they should be eating a slice of humble pie after that effort last autumn.

The private sector surveys conducted by Markit were a story of two halves.

Despite sustained strong growth in services business activity in March, the Composite Output Index slipped from a four-month high of 52.8 in February to 51.4, its lowest reading since June 2013. This reflected a marked fall in goods production – the steepest since July 2012.

In terms of absolute levels care is needed as this survey showed growth when the German economy contracted in the third quarter of last year. The change in March was driven by something that was eye-catching.

Manufacturing output fell markedly and at the fastest
rate since 2012, with the consumer goods sector joining
intermediate and capital goods producers in contraction.

Comment

A truism of the Euro era is that the ECB sets monetary policy for Germany rather than for the whole area. Whilst that has elements of truth to it the current debate at the ECB suggests that it is “The Precious” which takes centre stage.

A debate on whether to “tier” the negative interest rates that banks pay on the idle cash they park at the ECB is now underway, judging by recent ECB comments and the minutes from the March meeting. ( Reuters)

There is a German element here as we note a Deutsche Bank share price of 7.44 Euros which makes any potential capital raising look very expensive especially to existing shareholders.. Also those who bought the shares after the new hints of a merger with Commerzbank have joined existing shareholders in having singed fingers. Maybe this is why this has been floated earlier.

The next frontier for stimulus at the ECB should include stock purchases, BlackRock’s Rick Rieder says

Will he provide a list? I hope somebody at least pointed out that the Japanese experience of doing this has hardly been a triumph.

It all seems not a little desperate as we see that ECB policy remains very expansionary at least in terms of its Ivory Tower models. It’s ability to assist the German economy has the problem that it already holds some 511 billion of German bonds at a time when the total numbers are shrinking, so there are not so many to buy.

This from Friday suggests that should the German government so choose there is plenty of fiscal space.

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.

That is confirmed by so many of Germany’s bond having a negative yield illustrated by its benchmark ten-year yield being 0% as I type this.

The catch is provided by my junkie culture economics theme. Why after all the monetary stimulus does even Germany apparently need more? In addition if we have been “saved” by it why is the “speed limit” for economic growth now a mere 1.5%?

They can tell you what to do
But they’ll make a fool of you ( Talking Heads )

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