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 Europeâ€™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.
Both exports and investment spending plunged in Germany during the first quarter, dragging the economy down into its deepest economic slump on record.
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. Thatâ€™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.
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 (â€“ 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 â€œrays of lightâ€, thereâ€™s still â€œno reliable indication that the global economy is past the worst.â€ The euro-region economy may only â€œgradually stabilize during the latter part of 2009.â€
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:
Itâ€™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 thereâ€™s a European savings glut which is coming out of Germany. And itâ€™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?