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

 

 

Is Hong Kong in a recession or a depression now?

Some days an item of news just reaches out and grabs you and this morning it has come from the increasingly troubled Hong Kong. We knew that there would be economic consequences from the political protests there but maybe not this much.

The Census and Statistics Department (C&SD) released today (October 31) the advance estimates on Gross Domestic Product (GDP) for the third quarter of 2019.     According to the advance estimates, GDP decreased by 2.9% in real terms in the third quarter of 2019 from a year earlier, compared with the increase of 0.4% in the second quarter of 2019.

The commentary from a government spokesman confirmed various details.

marking the first year-on-year contraction for an individual quarter since the Great Recession of 2009, and also much weaker than the mild growth of 0.6% and 0.4% in the first and second quarters respectively. For the first three quarters as a whole, the economy contracted by 0.7% over a year earlier. On a seasonally adjusted quarter-to-quarter comparison, the fall in real GDP widened to 3.2% in the third quarter from 0.5% in the preceding quarter, indicating that the Hong Kong economy has entered a technical recession.

The concept of recession first switched to technical recession meaning a minor one ( say -0.1% or -0.2% GDP growth) but now seems to encompass what is a large fall. Time for Kylie again I guess.

I’m spinning around
Move outta my way

A clue to the change is the way that the year so far has fallen by 0.7% in GDP terms. If we look back we see that annual GDP growth of 3.8% slowed a little to 3% from 2017 to 18. But the quarterly numbers have been falling for a while. In annual terms GDP growth was 2.8% in the third quarter of 2018 but then only 1.2% in the last quarter and then going 0.6%, 0.4% and now -2.9% this year.

The Details

If we take the advice of Kylie and start breaking it down we see this.

Gross domestic fixed capital formation decreased significantly by 16.3% in real terms in the third quarter of 2019 from a year earlier, compared with the decrease of 10.8% in the second quarter.

Investment has taken quite a dive as this time last year it was increasing at an annual rate of 8.6%. Indeed the private-sector full stop took a fair hammering.

private consumption expenditure decreased by 3.5% in real terms in the third quarter of 2019 from a year earlier, as against the 1.3% growth in the second quarter.

The one bright spot was government expenditure.

     Government consumption expenditure measured in national accounts terms grew by 5.3% in real terms in the third quarter of 2019 over a year earlier, after the increase of 4.0% in the second quarter.

Is it too cheeky to suggest that at least some of this will be police overtime? So far it is not increased unemployment payouts

     The number of unemployed persons (not seasonally adjusted) in July – September 2019 was 120 300, about the same as that in June – August 2019 (120 600). The number of underemployed persons in July – September 2019 was 41 500, also about the same as that in June – August 2019 (41 000).

The flickers of acknowledgement of the present troubles were in the employment not the unemployment numbers.

 Total employment decreased by around 8 200 from 3 863 600 in June – August 2019 to 3 855 400 in July – September 2019. Over the same period, the labour force also decreased by around 8 500 from 3 984 200 to 3 975 700.

Also does the labour force fall suggest some emigration?

However you spin it the commentary is grim.

As the weakening economic conditions dampened consumer sentiment, and large-scale demonstrations caused severe disruptions to the retail, catering and other consumption-related sectors, private consumption expenditure recorded its first year-on-year decline in more than ten years. The fall in overall investment expenditure steepened amid sagging economic confidence.

Trade

This added to the woes as you can see below.

Over the same period, total exports of goods measured in national accounts terms recorded a decrease of 7.0% in real terms from a year earlier, compared with the decrease of 5.4% in the second quarter. Imports of goods measured in national accounts terms fell by 11.1% in real terms in the third quarter of 2019, compared with the decline of 6.7% in the second quarter.

Ironically this looks like a boost to GDP from a tale of woe. This is because the fall in imports ( a boost to GDP) is larger than the fall in exports. This situation reverses somewhat in the services sector presumably mostly due to lower tourism revenue.

Exports of services dropped by 13.7% in real terms in the third quarter of 2019 from a year earlier, following the decline of 1.1% in the second quarter. Imports of services decreased by 3.8% in real terms in the third quarter of 2019, as against the increase of 1.3% in the second quarter.

Looking Ahead

That was then and this is now so what can we expect?

Looking ahead, with global economic growth expected to remain soft in the near term, Hong Kong’s exports are unlikely to show any visible improvement. Moreover, as the adverse impacts of the local social incidents have yet to show signs of abating, private consumption and investment sentiment will continue to be affected. The Hong Kong economy will still face notable downward pressures in the rest of the year.

If we look at the results from the latest official quarterly business survey and note what happened in the third quarter then we get a proper Halloween style chill down the spine.

 For all surveyed sectors taken together, the proportion of respondents expecting their business situation to be worse (32%) in Q4 2019 over Q3 2019 is significantly higher than that expecting it to be better (7%).  When compared with the results of the Q3 2019 survey round, the proportion of respondents expecting a worse business situation in Q4 2019 as compared with the preceding quarter has increased to 32%, against the corresponding proportion of 17% in Q3 2019.

According to the South China Morning Post then prospects for China continue to weaken.

The manufacturing purchasing managers’ index (PMI), released by the National Bureau of Statistics (NBS) on Thursday, stood at 49.3 in October, down from 49.8  in September.  The non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – came in at 52.8 in October, below analysts’ expectations for a 53.6 reading. The figure was also down from September’s 53.7, dropping to its lowest level since February 2016.

As to Japan there seems to be little hope as the Bank of Japan just seems lost at sea now.

As for the policy rates, the Bank expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost.

Comment

As you can see the situation in Hing Kong is clearly recessionary and the size of it combined with the fact that it looks set to continue means it is looks depressionary as well. There has been a monetary respone but this of course only represents maintenance of the US Dollar peg.

The Hong Kong Monetary Authority (HKMA) announced today (Thursday) that the Base Rate was adjusted downward by 25 basis points to 2% with immediate effect according to a pre-set formula.  The decrease in the Base Rate follows the 25-basis point downward shift in the target range for the US federal funds rate on 30 October (US time).

As to the guide provided by the narrow money supply there is this.

The seasonally-adjusted Hong Kong dollar M1 decreased by 0.5% in September and by 3.4% from a year earlier, reflecting in part investment-related activities.

However you spin it people are switching from Hong Kong Dollars to other currencies.

The Investing Channel