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Everything In Germany Is Going Up….

Everything in Germany is going up, except it seems the real economy – and except of course prices, which were stationary in May (that is a change of 0% year on year – the lowest inflation rate for over 20 years). Anyway, today it was the turn of investor confidence to put in another good reading. In fact German investor confidence rose to what is effectively a three-year high in June. Aparently investors feel the recession in Europe’s largest economy is bottoming out.

The ZEW Center for European Economic Research said its index of investor and analyst expectations increased to 44.8 from 31.1 in May – the highest reading since May 2006.


Unfortunately, there is little real evidence to support this highly optimistic view of the future.

True German retail sales were also up in April – for the first time in four months – as warmer weather, falling prices and the late Easter holiday seem to have encouraged consumers to spend more. Seasonally adjusted rose 0.5 percent from March, according to the Federal Statistics Office. Nonetheless, year on year sales were still down 0.8 percent.


And in the longer run German retail sales are declining steadily.


Indeed according to the May retail sales PMI Germany posted the steepest fall in monthly sales among the “big three”, replacing Italy poll position. The German PMI fell to 46.3, the twelfth successive month the measure has shown a negative reading. Interestingly, the PMI more or less accurately picked up the improved position in April.

germany+PMI.png Exports Still Stuck At A Very Low Level – And Falling

Both exports and investment spending plunged in Germany during the first quarter, dragging the economy down into its deepest economic slump on record.german+exports.png

Exports were down 9.7 percent from the fourth quarter of last year and company investment declined 7.9 percent, according to the detailed report from the Federal Statistics Office. The Office reported that GDP fell a seasonally adjusted 3.8 percent from the previous three months, confirming the initial estimate from May 15. That’s the largest drop since quarterly data were first compiled in 1970.


German exports have not touched bottom yet, and they are still falling, with seasonally and working day adjusted exports dropping 4.8 percent in April from March, when they rose a revised 0.3 percent. Since the German economy is completely export dependent, this implies the obvious, that the German economy is still contracting. I don’t think anyone ever doubted this, but looking at the way the investor confidence reading is being presented today, you could be forgiven if you had gained the opposite impression.


Indeed on a year on year basis, exports were down by 22.9%, the fastest rate of decline registered so far, although since such annual stats are not working day corrected I wouldn’t read too much into that just yet, since you really do need to average across March and April due to the Easter impact.

germany+one.png Both Trade And Investment Drive The Economy Downwards

Looked at between quarters the German economy contracted by 2.2% (or at an 8.8% annualised rate) over the last three months of 2008, following a 0.5% drop in both the second and third quarters of last year.

According to the statistics office, the decline was mainly due to movements in the balance between exports and imports (goods and services combined). As in the fourth quarter of 2008, German exports fell much more than imports. The negative first quarter performance was also associated with a notable decline in investments (down 7.9%, quarter on quarter). Capital formation in machinery and equipment, in particular, was much lower. Companies invested 16.2% less in machinery, equipment and vehicles than in the last quarter of 2008.


Inventories were allowed to deplete during the quarter, which reduced growth by 0.5 percentage points. The only really positive elements were household and government consumption, which were up by 0.5% and 0.3% respectively.

In contrast to the bleak picture for investment, fixed capital formation and German exports, final consumption expenditure was ever so slightly up quarter on quarter – by 0.1% – and even did slightly better than in the last quarter of 2008 (– 0.0%).


On a year on year basis, household consumption was marginally down though – by 0.1% (following a 0.5% drop in the fourth quarter of 2008), general government consumption expenditure, however, was up by 0.8%.

The Long Term Outlook

The first-quarter GDP performance has thus completed an unprecedented four quarters of continuous contraction for the Germany economy. The German government has said it now expects the economy to contract by 6 percent over the year as a whole, and even optimist ECB council member Axel Weber has admitted that while he can see some positive “rays of light”, there’s still “no reliable indication that the global economy is past the worst.” The euro-region economy may only “gradually stabilize during the latter part of 2009.”

The longer term decline in German GDP performance is now pretty clear (see chart below).


According to the Federal Statistics Office:

Measured in terms of gross domestic product changes at 1995 prices, the rates of economic growth in the former territory of the Federal Republic of Germany and – since 1991 – in Germany have continuously declined since 1970. While the average annual change was 2.8% between 1970 and 1980, it amounted to 2.6% between 1980 and 1991 and to 1.5% between 1991 and 2001.

Since 2001 the performance of the German economy has in fact been worse rather than better, much to the consternation of those who hoped that many years of sacrifice in the form of wage deflation and structural reform would lead to a rebirth of the country’s former economic prowess. In reality the German economy shrank (0.2%) in 2003, and grew by only around 1% in both 2004 and 2005. And while the German economy picked up notably in 2006 and 2007 (with growth rates of 3.2% and 2.6% respectively) and many talking in terms of such grandiose notions as global uncoupling and “Goldilocks” type sustainable recoveries, the most striking feature of the recent German dynamic has been the way that internal demand failed to respond to the externally driven export stimulus. Of course, all the speculation came to an abrupt end in 2008 when the German economy once more entered recession as world trade expansion slowed and exports collapsed (with GDP only growing by 1% over the year), while 2009 looks set to be a lot worse (with the IMF currently forecasting a contraction somewhere in the region of 5%, and forecasts of up to minus 7% not seeming exaggerated).


What we seem to have here is “engine faliure” rather than mere “magneto problems” (using Claus Vistesen’s memorable phrase for a very similar situation in the Japanese economy, and it would be nice if the current crisis could serve as the stimulus for an open, and “in the real world” debate about why this is. So some part of the traditional mechanism of economic transmission seems to have been broken, and the “second leg” of the economic cycle, the domestic consumtion driven one, seems no longer to work. Long term GDP growth rates in the German economy are clearly falling, and the decline looks clearly set to continue.

And as Will Hutton points out to Paul Krugman – on top of the massive drop in economic activity there is a huge potential banking crisis looming over the horizon. The IMF have warned that Germany could be looking at over $500bn of writedowns. German banks – according to Hutton – hold a trillion dollars – maybe more – of maturing collateralised debt obligations. And as Krugman says:

It’s Germany on a global scale that is the concern. We worry about the drag on world demand from the global savings coming out of east Asia and the Middle East, but within Europe there’s a European savings glut which is coming out of Germany. And it’s much bigger relative to the size of the economy.

So we know that the German economy (like its Swedish counterpart) is now by and large a very unstable cocktail of accumulating surpluses and using them to finance risky lending elsewhere. But why and how exactly has Germany gotten into this mess. On this there is largely silence. The falling and ageing population issue couldn’t have anything to do with it, now could it?


Originally published at Euro Watch and reproduced here with the author’s permission.

3 Responses to “Everything In Germany Is Going Up….”

GuestJune 21st, 2009 at 5:03 pm

Actually, the reason why that happens to Germany may be quite simple:there are statistics published by the German federal statistics agency. If you put the graphs of two of them on top of each other, you can see an anti-correlation of domestic investments and corporate profits. That is probably due to the growth potential of emerging markets forcing domestic companies to put their money elsewhere to work. And our politicians want to combat that growth potential with low wages and low corporate taxes — which just CAN NOT work. And it did not work. And it won’t work either. The protectionist extreme we will probably face in the coming years should have been done at a sane level in the past — to achieve something sustainable. In the end, there is just too much German capital invested elsewhere and being of no use to the German consumer and worker. (just my guess from my years long observation of things around here)Free markets always lead to imbalances (earlier or later). Free markets correct these imbalances — but the corrections may be in forms of massive defaults combined with massive economic catastrophes. A free market is really like evolution. If you want it, then be prepared for extinction of some parts of the economy.

The AlarmistJune 26th, 2009 at 2:52 am

Don’t confuse Germany with a market economy. I can think of dozens of reasons why things are slowing, for example …The amount of time people waste standing on line to return their drink-bottles to the store to collect the aggressive “Pfand” (deposits) is simply staggering;Most stores are closed on Sunday.They charge for plastic bags at the local market. Green friendly, maybe, if you ignore the hidden costs, but economically counterproductive with certainty. It really is cute to see the frugal germans scrambling to grab the discarded boxes at their local Aldi so they don’t have to spring €0.25 for a plastic bag. But who will buy more stuff when fewer people are needed to produce the plastic bags that are not in demand at such a price?Taxes on everything are prohibitive, including a 19% VAT that is one of the higher rates in Europe, which parks on top of a marginal income tax rate of 42%, which is alongside social security costs that are roughly 20% each for employee and employer. Only in New York would I have a higher overall burden.Doctors only treat the symptoms that you complain about or that are obviously presented … this is how you try to make health-care more affordable, by denying there is a problem until it resolves itself. This is kind of what the Big O is going for with his proposed US health-care plan, but think about it … if people are not consuming health care services and products, then what happens to growth in that sector? You have more bureaucrats, less innovation, and more suffering … and its not that affordable, costing an employee as much as €250 per month of after-tax income, which is matched by the employer. A US person who expects the same treatment at the same cost split they might have had in a US employer-sponsored plan is seriously deluded, but worse still, the motivation for millions to enter into this field is stifled, so they may as well go tend their little gardens with all the sick and dying people who can’t afford to go anywhere or do anything because they are pensioned early due to illness and disability.And most vexing of all, I cannot land my airplane at most small airports after dark because nobody is on duty to man the fire-truck and radio, meaning I fly far fewer business trips in my own aircraft because I can’t get home before the airport closes, meaning that while there is somewhat fuller employment for a few people who work for the quasi-governmental Deutsche Flug Sicherung, there is substantially less employment for all the other average folks who would be working in a number of other support roles and the lack of activity further compounds itself as what used to be a leader is aviation has fewer and fewer airports each year;… Which makes the average German happy since they hate airplane noise … all airplane noise. This is one reason why major shipping companies like Fedex have a hellish time trying to set up hubs in Germany, costing the country thousands of jobs.You get the idea.