Economic growth German style has hit the buffers

Today gives us the opportunity to look at the conventional and the unconventional so let us crack on via the German statistics office.

WIESBADEN – The corona pandemic hits the German economy hard. Although the spread of the coronavirus did not have a major effect on the economic performance in January and February, the impact of the pandemic is serious for the 1st quarter of 2020. The gross domestic product (GDP) was down by 2.2% on the 4th quarter of 2019 upon price, seasonal and calendar adjustment. That was the largest decrease since the global financial and economic crisis of 2008/2009 and the second largest decrease since German unification. A larger quarter-on-quarter decline was recorded only for the 1st quarter of 2009 (-4.7%).

So we start with a similar pattern to the UK as frankly a 0.2% difference at this time does not mean a lot. Also we see that this is essentially what we might call an Ides of March thing as that is when things headed south fast. However some care is needed because of this.

The recalculation for the 4th quarter of 2019 has resulted in a price-, seasonally and calendar-adjusted GDP decrease of 0.1% on the previous quarter (previous result: 0.0%).

For newer readers this brings two of my themes into play. The first is that I struggled to see how Germany came up with a 0% number at the time ( and this has implications for the Euro area GDP numbers too). If they were trying to dodge the recession definition things have rather backfired. The second is that Germany saw its economy turn down in early 2018 which is quite different to how many have presented it. Some of the news came from later downwards revisions which is obviously awkward if you only read page one, but also should bring a tinge of humility as even in more stable times we know less than we might think we do.

Switching now to the context there are various ways of looking at this and I have chosen to omit the seasonal adjustment as right now it will have failed which gives us this.

a calendar-adjusted 2.3%, on a year earlier.

No big change but it means in context that the economy of Germany has grown by 4% since 2015 or if you prefer returned to early 2017.

In terms of detail we start with a familiar pattern.

Household final consumption expenditure fell sharply in the 1st quarter of 2020. Gross fixed capital formation in machinery and equipment decreased considerably, too.

But then get something more unfamiliar when we not we are looking at Germany.

However, final consumption expenditure of general government and gross fixed capital formation in construction had a stabilising effect and prevented a larger GDP decrease.

So the German government was already spending more although yesterday brought some context into this.

GERMAN FINANCE MIN. SCHOLZ: OUR FISCAL STIMULUS MEASURES WILL BE TIMELY, TARGETED, TEMPORARY AND TRANSFORMATIVE. ( @FinancialJuice )

As he was talking about June I added this bit.

and late…….he forgot late….

Actually they have already agreed this or we were told that.

Germany has approved an initial rescue package worth over 750 billion euros to mitigate the impact of the coronavirus outbreak, with the government taking on new debt for the first time since 2013.

The first package agreed in March comprises a debt-financed supplementary budget of 156 billion euros and a stabilisation fund worth 600 billion euros for loans to struggling businesses and direct stakes in companies. ( Reuters )

Warnings

There is this about which we get very little detail.

Both exports and imports saw a strong decline on the 4th quarter of 2019.

If we switch to the trade figures it looks as though they were a drag on the numbers.

WIESBADEN – Germany exported goods to the value of 108.9 billion euros and imported goods to the value of 91.6 billion euros in March 2020. Based on provisional data, the Federal Statistical Office (Destatis) also reports that exports declined by 7.9% and imports by 4.5% in March 2020 year on year.

Ironically this gives us something many wanted which is a lower German trade surplus but of course not in a good way. A factor in this will be the numbers below which Google Translate has allowed me to take from the German version.

Passenger car production (including motorhomes) was compared to March 2019
by more than a third (-37%) and compared to February 2020 by more than a quarter (-27%)
around 285,000 pieces back.

The caveats I pointed out for the UK about seasonality, inflation and the (in)ability to collect many of the numbers will be at play here.

Looking Ahead

The Federal Statistics Office has been trying to innovate and has been looking at private-sector loan deals.

The preliminary low was the week after Easter (16th calendar week from April 13th to 19th) with 36.7% fewer new personal loan contracts than achieved in the previous week. Since then, the new loan agreements have ranged from around 30% to 35% below the same period in the previous year.

That provides food for thought for the ECB and Christine Lagarde to say the least.

Also in an era of dissatisfaction with conventional GDP and the rise of nowcasting we have been noting this.

KÖLN/WIESBADEN – The Federal Office for Goods Transport (BAG) and the Federal Statistical Office (Destatis) report that the mileage covered by trucks with four or more axles, which are subject to toll charges, on German motorways decreased a seasonally adjusted 10.9% in April 2020 compared with March 2020. This was an even stronger decline on the previous month than in March 2020, when a decrease of -5.8% on February 2020 had been recorded, until then the largest month-on-month decline since truck toll was introduced in 2005.

That is quite a drop and leaves us expecting a 10%+ drop for GDP in Germany this quarter especially as we note that many service industries have been hit even harder.

Comment

I promised you something unconventional so let me start with this.

Covid-19 has uncovered weaknesses in France’s pharmaceutical sector. With 80 percent of medicines manufactured in Asia, France remains highly dependent on China and India. Entrepreneurs are now determined to bring France’s laboratories back to Europe. ( France24 )

I expect this to be a trend now and will be true in much of the western world. But this ball bounces around like Federer versus Nadal. Why? Well I immediately thought of Ireland which via its tax regime has ended up with a large pharmaceutical sector which others may now be noting. Regular readers will recall the times we have looked at the “pharmaceutical cliff” there when a drug has lost its patent and gone full generic so to speak. That might seem odd but remember there were issues about things like paracetamol in the UK for a bit.

That is before we get to China and the obvious issues in may things have effectively been outsourced to it. Some will be brought within national borders which for Germany will be a gain. But the idea of trade having a reversal is not good for an exporter like Germany as the ball continues to be hit. Perhaps it realises this hence the German Constitutional Court decision but that risks upsetting a world where Germany is paid to borrow and of course a new Mark would surge against any past Euro value.

 

Why I am expecting a rise in Euro area economic activity

One of the fun parts of being a Notayesman is that such a mindset gives the ability to quickly get on the pace with potential changes in trend. This morning what has been our most reliable indicator over the past couple of years looks like it is providing such an opportunity so let us get straight to it.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 7.4% in March from 6.6% in February. ( European Central Bank or ECB).

This adds to what I reported on the 28th of last month.

Moving onto happier news for the ECB this morning’s money supply release provided a bit of relief.

 

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 6.6% in February from 6.2% in January.

As you can see the annual growth rate has now picked up quite a bit as we start our money supply journey in 2019. In isolation this indicates a strengthening of the Euro area economy and returning to my opening theme this represents a change on a consensus which has in many cases only just caught up with our previous narrow money supply trend which led to the Euro area economy singing along with Alicia Keys.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fall

Whereas now we have an indicator that there are better prospects for the summer as narrow money supply data looks around 3 months or so ahead. For those of you wondering how this works? The mechanisms here were described by Anna Schwartz some years back.

Because money is used in virtually all economic transactions, it has a powerful effect on economic activity. An increase in the supply of money puts more money in the hands of consumers, making them feel wealthier, thus stimulating increased spending. Business firms respond to increased sales by ordering more raw materials and increasing production. The spread of business activity increases the demand for labor and raises the demand for capital goods.

In my view this works best for narrower measures of the money supply because as she points out it is.

M1, a narrow measure of money’s function as a medium of exchange;

In general it gets spent and boosts nominal GDP. As to the real GDP we really want that tends to go with it unless there is big shift in inflation prospects. That is less likely to happen when we have a shorter time span.

Some Perspective

If we look back on the data we see an annual rate of growth which was last at this level in June last year. Up to then it had been falling from the 9.7% of September 2017. So if sustained we have regained about a third of the decline.

War on Cash

With there being an apparent turn for the better in the narrow money supply this may prove to be a bit like of on the cunning plans of Baldrick from the TV series Blackadder. From Carolyn Look of Bloomberg on Friday.

Fun fact: today was the last day Germany & Austria issued the €500 note. All other € countries stopped in January. Us Germans need a little more time to say goodbye when it comes to cash (but don’t worry, you can still use the ones that are circulating).

Whether that will be something of a brake on the money supply only time will tell, But the official theme that this is to combat money laundering has been torpedoed by the reality of the enormous scale of such activity in the banking sector of the Baltics. As ever no-one is suggesting that part of “the precious” needs eliminating nor are those banks being called “Bin Ladens” as the notes once were.

Broad Money

This too has picked up but March had a disappointing kicker which is explained if we go straight to the detail.

Looking at the components contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 4.9 percentage points (up from 4.3 percentage points in February), short-term deposits other than overnight deposits (M2-M1) contributed -0.1 percentage point (as in the previous month) and marketable instruments (M3-M2) contributed -0.3 percentage point (down from 0.0 percentage point).

The broader elements of the money supply shrank with a small reduction as we move to M2 but a 0.3% one if we move to M3. The latter matters because if we move from the ECB description to the real impact we are looking at a view on bank lending and its prospects.

Thus more of this seems to be on the cards.

 Among the borrowing sectors, the annual growth rate of adjusted loans to households stood at 3.2% in March, compared with 3.3% in February, while the annual growth rate of adjusted loans to non-financial corporations decreased to 3.5% in March from 3.8% in February.

As you can see this weakened although to my mind this is usually a lagging indicator for economic activity which for a while has been reflecting the better economic growth of this time last year.

Comment

The obvious question is how much of a pick-up in economic activity is on the cards. We have just seen quarterly economic growth of 0.1% followed by 0.2% on the one hand which was quite a drop on the 0.7% of 2017. But a rally to a period of 0.3%/0.4% in terms of quarterly growth looks on the cards. We can look at that in two ways and the opening view is that it is an improvement. Ironically it is the ECB itself that undercuts this with its view.

In our latest staff projections, the euro area growth outlook for 2019 has been revised down substantially, to an annual growth rate of 1.1%.

Also in line with other central banks it thinks that an annual growth rate of 1.5% is as good as it now gets. I am not sure how that works with the US reporting an annualised growth rate of 3.2% as it did in Friday but Ivory Towers are seldom bothered by such matters.

Looking more specifically we can expect a boost for the Euro area domestic economies as we wait to see what happens on the trade front. To my mind this morning’s surveys for the Euro area mostly reflect the difficult period we have just seen.

Euro area economic confidence falls to its weakest level since September 2016. ( @forexlive)

Another way of looking at it can be provided by services doing okay whilst manufacturing which relies on exports is not doing okay.

Adding to the more upbeat theme is the way the Euro has been depreciating. It rather conveniently went to 100 at the end of September in trade-weighted terms or as Maxine Nightingale sang.

Ooh, and it’s alright and it’s coming along
We gotta get right back to where we started from
Love is good, love can be strong
We gotta get right back to where started from
A ha

It is now 96.5 which is certainly the equivalent of a 0.25% interest-rate cut and maybe a bit more.

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