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Friday, May 15, 2009

German GDP Falls At An Incredible 15.2% Annualised Rate

by Edward Hugh: Barcelona

“I believe there are some grounds for being optimistic that the pace of decline in economic activity will decelerate markedly in the months ahead,” was the view being expressed by Bundesbank President Axel Weber earlier this week. And we'd better hope he's right, since with figures from the Federal Statistics Office this morning showing that Germany's recession worsened considerably in the first quarter, with the economy shrinking by 3.8 percent compared with the previous three-month period I would hate to see it accelerating. Basically a 3.8 percent contraction in three months is equivalent to a 15.2% contraction as an annualised rate, so the chances are he is right, this is a breathtaking pace, and is unlikely to be maintained. But slowing down the rate of contraction is hardly equivalent to recovery, a point weber was quick to reinforce. “However, it is certainly not advisable to be overly optimistic that the recovery process is safely on track. This will most likely be a gradual process," he added.

This is, in fact, the fourth consecutive quarter of contraction, and is the worst performance by the German economy since at least 1970 - when the German statistics office started the present time series. It is also the first time since reunification in 1990 that the German economy has experienced so many quarters of negative growth. GDP has was dragged down by the drop in export and and the consequent weakness in investment.

Year on year GDP fell by 6.7%, following a 1.7% reading in the fourth quarter of last year. Corrected for working days, GDP fell by 6.9% year on year. Last month the government revised its forecasts and is now expecting an annual contraction of 6%.

The 16-nation euro zone also slumped by a record of 2.5 percent quarter on quarter in the first there months. This is worse most analysts had been predicting as recently as a few days ago, when forecasts were pointing to a decline of around 2 percent. While Germany, Europe's largest economy saw the deepest slump, Austria was not far behind with a drop of 2.8 percent and Italy with its 2.4 percent contraction in the first quarter. Meanwhile, Europe's second largest economy, France, also saw negative growth, sliding by 1.2 percent. The 27 member European Union shrank by a quarterly 2.5 percent.

The sharpness of the German GDP contraction in the first quarter of this year is unlikely to be repeated during the rest of 2009, according to German government spokesman Thomas Steg, and given the ferocity of the downturn he is surely likely to be right. But not shrinking so fast is not the same as growing, and there is evidently a lot more pain in the works yet.

There are a number of signs of just this slowing down in the contraction already emerging. Retailer slaes in Germany fell at the slowest pace in the current 11-month sequence of decline in April, according to the Bloomberg retail PMI. Sales were down only modestly in marked contrast to the steep declines recorded at the start of the year. Month-on-month the index for Germany picked up from 44.4 in March to 48.9.

Manufacturing Contraction Eases

German manufacturing contracted for the ninth month running in April, though the pace of the downturn eased to its slowest since last November. The headline manufacturing PMI in Europe's largest economy registered 35.4, still a very low level, but nonetheless up significantly from March's reading of 32.4.

"April's survey provides hope that the German manufacturing downturn has passed its nadir, as the PMI moved further above January's record low," according to Tim Moore, economist at Markit Economics. "However, output still fell at a rate unprecedented prior to the fourth quarter of 2008, prompting firms to trim employment and inventories to the greatest extent in the survey history," he added.

New orders declined for the tenth successive month but at a much slower pace than in March, with the sub-index rising to 37.0 from 28.9 - a series record month-on-month rise. The improvement in the PMI results fits in with other recent sentiment indicator readings in German, with the Ifo institute's business climate index improving in April to its best level in five months, while the ZEW investor sentiment gauge rose to its highest level in almost two years. However, we are still a far cry from a return to output growth in Germany, with most observers anticipating a GDP contraction of between 5% and 7% for 2009, and given the export dependence we should be looking for an increase in imports in main customer economies before we start thinking about any expansion in German manufacturing output.

Industrial Output

German industrial production held more or less steady in March, for the first time in six months. Output was unchanged from February, when it dropped 3.4 percent, according to the latest data from the Economy Ministry in Berlin. Manufacturing industry continued to contract however, and was down 0.4% on the month, and by 22.8% year on year.

That being said, German industrial output levels are now very low (see chart below), and are roughly comparable with those registered in 1999/2000.

Exports Recover Slightly In March

German exports were up for the first time in six months in March, adding to signs that the pace of the economic contraction slowed slighly as we entered the spring. Exports, adjusted for working days and seasonal changes, were 0.7 percent from February, when they fell 1.3 percent, according to the latest data from the Federal Statistics Office. Year on year exports were down 15.8% following a 23.5% drop in February and a 23.2% drop in January.

German imports increased 0.8 percent in March from the previous month, when they dropped 4.8 percent. The trade surplus widened to 11.3 billion euros from 8.6 billion euros in February. The surplus in the current account, the measure of all trade including services, was 10.2 billion euros, up from 6.8 billion euros. On a seasonally adjusted basis exports were up by 0.4 billion euros from February, which means you can just barely notice the change on the chart below: ie there is still a very long way to go here.

Services Contraction Also Slows

Activity in Germany's private sector shrank for the eighth month running in April, though as elsewhere the pace of the contraction eased, in the German case to the slowest rate since last October. The services sector PMI edged up to 43.8 from 42.3 in March, while the business expectations sub index jumped to 44.4 from 39.0, and the headline composite PMI reading rose to 40.1 from 38.3 in March.

Markit reported that "Pessimism about the year ahead outlook for activity was the least marked since June 2008. This partly reflected the support given to business sentiment from the government's economic stimulus plans, as well as hopes that overall market conditions will begin to stabilise". These firmer expectations are consistent with the rise in the April Ifo reading for German corporate sentiment, which hit its strongest level in five months.

However, despite the more positive business expectations, the German government has slashed its forecast for the economy, projecting a record 6-percent contraction this year. Previously it had not shrunk by more than 1 percent in any year since the second world war.

In harmony with this more sober assessment, the sub-index on employment fell to 40.6 from 42.3 in March. "We are now seeing the labour market feel the full force of the economic downturn, with the latest wave of private sector job losses the steepest for at least 11 years," according to Tim Moore, economist at Markit Economics. "This provides advance warning that April's spike in official unemployment numbers will be repeated during the months ahead ... firms are likely to make further substantial job cuts even after the worst of the recession has passed," he added. German unemployment rose for the sixth month running in April to hit its highest level since late 2007 despite government subsidies designed to prevent mass layoffs.

Consumer Confidence Holds Steady

German consumer confidence remained steady for a third consecutive month in April as slower inflation boosted household purchasing power and the pace of the economic contraction slowed slightly. GfK AG’s forward looking confidence index for May, based on a survey of about 2,000 people, remained unchanged from April's revised 2.5 percent reading.

Investor Sentiment Continues To Rise

The ZEW Indicator of Investor Sentiment continued to improve in April, and rose by 16.5 points to stands at 13.0 following a reading of minus 3.5 in March. For the first time since July 2007, The indicator was positive for the first time since July 2007, although it is still well below its long term historical average of 26.1.

According to ZEW the indicator has been positively affected by the German government stimulus packages. Furthermore, investors seem to be taking the view that low inflation rates may give some support private consumption. They also felt that the economic outlook for the United States has improved, and responded to some vaguely positive signals emanating from China.

“Along with other indicators, the ZEW sentiment indicator reveals that there are well-founded expectations that the downward dynamics of the business cycle are bottoming out. It is even becoming more likely that the economy will slowly recover in the second half of this year.”, says ZEW President Prof. Wolfgang Franz.

Whether Franz is right in this very upbeat assessment really does remain to be seen, since I personally am far convinced that we have the bottom of this anywhere in sight yet, especially given German export dependence and the fact that year on year contractions in imports are still very strong in nearly all the major customers.

But Unemployment Is Headed Steadily Upwards

German unemployment rose for the sixth straight month in April. The number of people out of work increased a seasonally adjusted 58,000 to 3.46 million, according to the Federal Labor Agency. The seasonally adjusted unemployment rate rose to 8.3 percent from 8.1 percent in March.

So while an increasing volume of data suggest confidence across Europe is stabilizing and the recession slowing, the continued increase in unemployment may well weaken consumer spending and help prolong the recession. And with PMI surveys showing the employment output as bleak both in the service and manufacturing industries further increases in unemployment now seem inevitable.

Job Creation Turns Negative In March

The number of those employed in Germany was down year on year in March for the first time in several years. According to provisional results from the Federal Statistical Office total March employment in Germany was 39.89 million - a decrease of 46,000 (–0.1%) on a year earlier. The last time the number of persons in employment decreased from the same month a year earlier was in February 2006.

Generally employment increases in March due to the usual spring rebound in economic activity. Over the last three years employment was up by an average 138,000 persons from February. This March, however, the increase was only 53,000 (+0.1%). The Federal Statistics Office noted that the significant extension of the short-time work probably rescued the numbers from being even worse.

Seasonally adjusted the total number of employed was 40.18 million in March, a seasonally adjusted decrease by 27,000 persons (–0.1%) on February.

While Deflation Dangers Remain

German producer prices fell for the first time in five years in March, suggesting that the deflation risks are increasing in Europe’s largest economy. Prices were down 0.5 percent from a year earlier following an annual 0.9 percent gain in February, according to data from the Federal Statistics Office. That’s the first annual decline since February 2004 and the biggest drop since September 2002.

Plenty More Downside To Come

Perhaps the worst casualty of all this will be German public finances. German tax revenue for 2009 is now projected to decline by more than an additional 300 billion euros as compared with previous estimates. Germany’s finance minster Peer Steinbruck is reportedly pretty depressed by the estimate, since it makes him the finance minister who presided over the highest borrowing requirement in history (as opposed to the finance minister who balanced the budget, which is what he set out to do). The economics minister, meanwhile, said that the loss in tax revenues was no reason not to cut taxes. The EU Commission now forecast Germany will have a deficit of 3.9% of GDP this year and 5.9% in 2010. As a result gross government debt is projected to climb from 65.9% of GDP in 2008 to 73.4% in 2009 and 78.7% in 2010.