The manufacturing sector of Germany has turned lower yet again

We have got used to seeing the economy of Germany stuttering recently. Although we only discovered it via later revisions it began in early 2018 which at the time we thought was still part of the “Euro boom”. Then 2019 became a difficult year and this morning has brought news that at the end of the year the pressure seems to have got even worse for manufacturing.

WIESBADEN – Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing decreased by a seasonally and calendar adjusted 2.1% in December 2019 on the previous month.

If we look at the break-down we find out more.

Domestic orders increased by 1.4% and foreign orders fell by 4.5% in December 2019 on the previous month. New orders from the euro area were down 13.9%, and new orders from other countries increased by 2.1% compared with November 2019.

So we have at the beginning a by now conventional trade war theme but then we note something worrying for the Euro area as a whole as there seems to be some economic contagion here. This will concern the new holder of the Grand Prix de l’Économie 2019 from Les Echos which is the President of the ECB Christine Lagarde.

There is a sectoral break-down too but I caution reading too much into it. This is because in the early part of 2018 various analysts told us that the break-down meant things would soon around and we know what happened next.

In December 2019 the manufacturers of intermediate goods saw new orders increase by 1.4% compared with November 2019. The manufacturers of capital goods saw a fall of 3.9% on the previous month. Regarding consumer goods, new orders fell 3.8%.

Indeed if we stick to economists expectations they seem to have been at it again according to the Financial Times.

 Economists polled by Reuters had expected an increase of 0.6 per cent.

Only 2.7% out….

There is a small amount of relief in finding out that the December drop was exacerbated by November being revised higher.

 For November 2019, revision of the preliminary outcome resulted in a decrease of 0.8% compared with October 2019 (provisional: -1.3%, because major orders from machinery and equipment that were reported later were not yet included).

However even so we see that the annual comparison is simply dreadful.

-8.7% on the same month a year earlier (price and calendar adjusted)

That compares to November which was 6% lower than a year before.

We get some perspective from the overall index which on a seasonally adjusted basis was 98.7 so for the first time we have a reading below the 100 average of 2015. In terms of a trend we see that things have been slip-sliding away since the 113.1 of December 2017. So that is quite a fall over two years. There has been a flicker of hope from domestic orders in the last couple of months but this has been swamped by the fall in foreign orders.

Turnover and Volume

The size of the fall is lower but we see a similar trend.

According to provisional results, price-adjusted turnover in manufacturing in December 2019 was down a seasonally and calendar adjusted 1.3% on the previous month. In November 2019, the corrected figure showed a decrease of 0.4%, compared to October 2019 (provisional: -0.5%).

We also see that the situation got worse in December.

Again we can see the overall picture because what is effectively a volume index  peaked at 108.9 in November 2017. Whereas in December it was 100.7 so not quite yet back to the average for 2015. However looking at the orders data above suggests we may see a fall below it this year.

Looking Ahead

On Monday we got the latest Markit PMI business survey and they opened with a hopeful sign.

Slower fall in new orders lifts PMI to 11-month
high in January.

This was based on a different picture to the official data we have looked at earlier as that was based on an improvement in export orders.

Principal upward pressure on the PMI in January came from a slower rate of decline in new orders, which in turn partly reflected the near stabilisation of export sales.

If we switch to actual production though we see this.

Output fell at the slowest rate for five months in January.
That said, the pace of decline remained notably faster than
that of new orders, with all three main industrial groupings .(consumer, intermediate and capital goods) recording lower production.

Again there is some potential for improvement as the rate of decline has slowed. Even so the overall situation is impacting an area which has been a strength of the German economy.

Employment continued fall sharply at the start of the year.
The rate of job shedding seen in January was unchanged
from the month before and has been exceeded only once (in
October 2019) since January 2010.

The summary tried to be upbeat for 2020.

Germany’s manufacturing sector showed more signs
of being on the way to recovery in January, with the PMI
climbing further from last September’s nadir to its highest for 11 months.

There was however quite a catch.

However, the picture has change somewhat in the short space of time since the survey was conducted [13-24 January], with the disruption to business in China from the coronavirus found to have an impact on German manufacturers’ exports and sentiment in the coming months.

The catch arrives with even the more optimistic tone for January leaving us with a spot reading of 45.3 which us well below the benchmark of 50.

The Service Sector

The business survey here was much more upbeat.

Germany’s service sector made a strong start to 2020,
recording faster growth in business activity, inflows of new
work and employment, latest PMI® data from IHS Markit
showed. Expectations towards output over the next 12
months also improved

So the German economy is to borrow a football analogy a story of two halves or as the survey puts it.

The result reflected the combination of a stronger increase in service sector business activity and a slower rate of decline in manufacturing production.

According to Markit the combination has gone from stagnation to slow growth.

Climbing from December’s 50.2 to 51.2, the Germany Composite* Output Index signalled a slightly faster, albeit modest rate of expansion.

Comment

The story here was summed up by Avril Lavigne.

Why’d you have to go and make things so complicated?

Much of this is the way that we have regularly been promised a turnaround by the media and analysts when in fact the manufacturing sector has been heading south for a couple of years now. Today’s official data may be revised a little higher ( that seems to be a developing pattern ) but 2019 was a very poor year for German manufacturing. Now another reported improvement looks likely to have been knocked on the head by the impact of the Corona Virus in what is looking ever more like a perfect storm.

If we switch to the ECB we see that for once its monetary policy seems appropriate for Germany. It has slowed down and the ECB has cut its interest-rate and although if you read this from Bundesbank President Jens Weidmann on Tuesday it seems he does not think it will help much.

Recent years have demonstrated that traditional interest rate policy may reach its limits.

Also does this count as an emergency again?

Mr Weidmann continues to take a critical view of the large-scale purchases of government bonds in the euro area. “In my opinion, they should be used only in emergencies.”

The undercut is whether the easy monetary policy makes much difference to a manufacturing slow down driven by a trade war and now a viral outbreak? I do not.Also we need to remind ourselves that the exchange rate policy where the Euro is much lower than where a Deurschemark would be continues to benefit Germany.

So Germany is on a recession tightrope where services are pulling it up but manufacturing pulling it down. So just as the UK departs the European Union the Germans are behaving like us. Also spare a thought for Eurostat which produced a 0.1% GDP growth reading for the Euro area at the end off 2019 but did not known this about Germany.

The Investing Channel

 

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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