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Thursday, March 12, 2009

Germany's Recession Worsens Again

by Edward Hugh: Barcelona

Well sometimes it never rains but it pours, and as far as Germany is concerned, economically speaking (and my condolences to each and every German for yesterday's tragedy) more than a "rainy season" what we seem to have is a monsoon, with a torrential downpour one day after the next. The lastest piece of bad news comes on the export front, with German exports dropping for a fourth consecutive month in January, as what is still Europe’s largest economy fell ever deeper into what is now its worst recession in 60 years. Working day and seasonally adjusted sales abroad fell 4.4 percent from December (when they dropped 4 percent). According to provisional data from the Federal Statistical Office, Germany exported goods to the value of EUR 66.6 billion and imported commodities to the value of EUR 58.1 billion in January 2009. Exports were thus 20.7% down in January when compared with January 2008, and imports were 12.9% down.

Germany had a foreign trade balance surplus of EUR 8.5 billion in January compared to EUR 17.3 billion in January 2008. According to provisional data from the Deutsche Bundesbank, the current account surplus was EUR 4.2 billion in January 2009, which included a services deficit of EUR1.5 billion, a factor income surplus of EUR 2.8 billion), a deficit on current transfers of EUR 4.3 billion). This was just a little over half the January 2008 current account surplus of EUR 15.6 billion.

Compared with January 2008, exports to EU countries decreased by 18.7%. A larger fall (–21.4%) was registered in exports to EU countries not belonging to the euro area.

The Fall In Exports Pulls Down German Industry With It

German industrial production plummeted by a dramatic 7.5 per cent in January, according to the latest data from the Economics and Technology Ministry, showing just how the global recession, and in particular the trauma which is shaking Eastern Europe's economies to their foundations, has tightened its grip on Germany. The seasonally adjusted fall in production was far worse than the 3-per-cent drop that analysts had forecast and suggests that all of this is now cutting very deep.

While Orders Slump

Meanwhile German manufacturing orders collapsed even further in January, plunging 38 percent from January 2008, the biggest drop since data for a reunified Germany started in 1991, according to the Economy Ministry. From December they fell 8 percent. Export factory orders were down 11.4 percent in January from December, with orders from outside the 16-nation euro region dropping 18.2 percent. Domestic demand dropped 4.3 percent in the month.

“The annual slump is absolutely catastrophic,” said Alexander Koch, an economist
at UniCredit MIB in Munich. “The extent of declines is terrifying.”

German plant and machinery orders from abroad plunged 47 percent in January from a year earlier, the biggest drop since data were first compiled in 1958, according to the VDMA machine makers association.

And February's PMI Data Only Gets Worse

And the bad news shows no sign of slowing up, since the Germany private sector shrank in February at the fastest rate in more than a decade according to the latest Composite Purchasing Managers reading. Final data from Markit economics showed the composite PMI fell to 36.3 from 38.0 in January, the lowest level registered since the series began in January 1998. The composite PMI reflects the results of services and manufacturing sector surveys.

"The German economy remained on a sharp downward trajectory in February as a result of rapidly falling manufacturing output and a marked downshift in the performance of the service sector," said Tim Moore, economist at Markit Economics.

The data were consistent with the German economy contracting by some 3 percent this year according to Markit estimates.The German government expects the economy to contract by around 2.25 percent this year, though some economists have suggested we may see a 5% contraction, and this is more or less the view I hold from what we have seen to date. Since World War Two, the German economy has never contracted by more than one percent in any one year.

The PMI for the manufacturing sector posted 32.1 in February, up from January's 32. Although the change was slight it is the first time the index has risen since March 2008, and may suggest that at least the rate of contraction may now not worsen.

Anecdotal evidence from the PMI survey suggested the decline in private sector activity reflected a reluctance among clients to commit to new work. A sub-index on new business fell to 31.7 from 35.2 in January, hitting a series low.

At the same time the final services sector PMI fell to 41.3 from 45.2 in January, hitting yet another series low.

Falling Retail Sales

Unsurprisingly German consumption has been falling.

Retail sales in Germany fell in January, falling on a seasonally adjusted basis by 0.6 percent from December. From a year earlier, retail sales declined 1.3 percent. Sales of food, tobacco and beverages declined 2.4 percent from a year earlier and households reduced spending on clothes and shoes by 1.5 percent. And although the Bloomberg Retail Purchasing Managers Survey showed an improvement in sales over the January reading - the German month-on-month index rose from 41.7 to a four-month high of 45.4 - they are still dropping. In fact the indicator has now shown German sales falling for nine successive months.

At the same time if we look at the seasonally adjusted retail sales index compiled by the Federal Statistics Office we will see that it has been declining even longer than the nine months registered by the PMI, since December 2006, in fact, and it is pretty plain to even the naked eye to see that sales never recovered from that "harmless" VAT rise - you know, the one which was supposed to have been hardly noticed.

Export Driven Economy?

The connection between expòrt growth and GDP growth in Germany is now pretty clear I think. Gross domestic product fell a seasonally adjusted 2.1 percent in Q4 2008, while exports were down 7.3 percent quarter on quarter. That’s the third consecutive quarterly drop in GDP and the biggest single quarterly fall since the first three months of 1987.

The main reason for the decline of the German economic performance is obviously the drop in net exports, i.e. the balance between exports and imports of goods and services. Price adjusted exports were down exports 7.3% while imports dropped 3.6%, so that the balance between exports and imports contributed minus 2.0 percentage points to the GDP decline.

German companies reduced investment in machinery and equipment in Q4, spending 4.9% less than in the third quarter. Previously gross fixed capital formation in machinery and equipment had risen for eight consecutive quarters. Capital formation in construction wasdown by 1.3% lower in the fourth quarter than a quarter earlier, and final household consumption expenditure fell by 0.1%. Most significantly, companies considerably increased their inventories between October and December, with the inventory build-up contributing a positive 0.5 percentage points to growth. If we put this 0.5 pp together with the 1 percentage point contributed in Q3 it is clear that there is a large unwind going to happen at some point. Basically you can subsidise output and jobs, but if there are no end consumers one link in the chain is missing.

As can be seen in the chart, and despite all that tostesterone driven "recoupling" bunk, household spending has been flat since the VAT hike, even in Germany's most sustained period of growth and job creation since the mid 1990s.

Unemployment On The Rise

German unemployment rose again in February although the new government job protection measures seemed, as the increase was less than might have been expected - in fact the jobless total increased by 40,000 (to 3.31 million), on a seasonally adjusted basis, pushing the seasonally adjusted unemployment rate from 7.8 per cent to 7.9 per cent, suggesting there has been a significant deterioration in labour market conditions since December.

On the other hand employment creation is slowing, and the number of persons in employment was 39.83 million in January, falling below the 40 million threshold for the first time since March 2008. In January 2009, employment was up on January 2008 by 107 000 persons or 0.3%. However employment dropped markedly from the previous month. Compared with December 2008, 1.7% or 704 000 less persons were employed. Typically, there is a significant decline in the number of persons in employment in the month of January. In both 2007 and 2008, ie during the full strength of the economic upswing, the number of persons in employment dropped by nearly half a million each year. However, as reported by the Federal Statistics Office the decline was rather stronger this year than in the two previous years.

On a seasonally adjusted basis the number of persons in employment amounted to 40.21 million in January 2009. Compared with the preceding month of December, that was a seasonally adjusted decline of 84 000.

In addition it has to be remembered that a significant number of people are being maintained in employment by the government support programme. Struggling businesses can apply to shorten working hours in exchange for government wage and social-insurance subsidies for a period of up to 18 months, compared to just six months in the past. Since October business have applied to cut the hours of some 775,000 workers, with more than 290,000 applications falling in January alone.

Under the arrangements, the Federal Employment Agency (BA) pays 60% (or 67% for employees with children) of the flat-rate calculation of the missing net pay for each eligible employee. Employers continue to pay their employees but will are reimbursed by the BA. If, for instance, the hours worked in a company are reduced by half, the employee receives only half of his/her normal pay. The BA then pays the employee 60% of the other half of his/her wage or salary. Thanks to substantially reduced wage costs, companies can usually manage without lay-offs, which benefits both sides, with the only proviso, as I say, that you still need to find someone to buy all those products (remember the rapidly accumulating inventories).

Companies announced last month that they’re planning to add a further 600,000 workers to those already working shortened shifts, according to Labor Agency head Frank-Juergen Weise.The share of German companies planning to cut jobs rose to 30 percent in January from 18 percent in October, according to a survey of 25,000 companies carried out by the DIHK chambers of trade and industry.

While Wages Have Been Rising

At the same time hourly labor costs in Germany’s manufacturing and service industries rose the most on record in the fourth quarter of last year, even as companies cut output and introduced shorter working hours. The cost of an hour’s work increased 3.9 percent in the fourth quarter from a year earlier, according to the Federal Statistics Office. That’s the biggest gain since the data was first compiled in 1997. Seasonally and working day adjusted hourly costs rose 1.7 percent from the third quarter.

Gross wages and salaries among manufacturing and service companies increased 4.1 percent from a year earlier after gaining 2.4 percent in the third quarter. Non-wage costs rose 3.1 percent in the fourth quarter from a year earlier after gaining 1.7 percent in the third quarter.

Despite - or perhaps becuase of - all that added employment, overall labour productivity (price-adjusted gross domestic product per person in employment) decreased by 2.6% in Q4 2008 over a year earlier. While measured per hour worked, labour productivity fell by 1.3%, the number is lower because the number of hours worked per persons in employment dropped by 1.2%.

Fiscal Prudence To Come?

Germany's government has come under some criticism for failing to introduce a hefty enough stimulus programme. Angela Merkel’s government is trying to soften the impact of the recession by spending about 80 billion euros over two years to support the economy, with measures which include investment in schools and roads, lower health- insurance payments, tax breaks and incentives to buy new cars. The efforts amount to about 1.5 percent of gross domestic product, according to the IMF, which has called for stimulus of at least 2 percent of GDP from all countries.

However at the same time as the German government is under pressure from the IMF (and US Treasury secretary Timothy Geithner, who has called the IMF proposal "a reasonable benchmark") to move in one direction, it is coming under pressure from th EU Commissioon to think about moving in the other, and Germany's next government may well need to start to cut spending as early as 2011 in order to start to move towards a balanced budget, according to European Union finance ministers meeting held in Brussels this week.

After conducting “expansionary” fiscal policy this year and next to combat its deepest recession since World War II, Germany should “reverse the fiscal stimulus in order to support significant budgetary consolidation,” the EU finance ministers said in response to budget plans presented by Germany. The German government forecasts the German budget, which was almost balanced last year, will show a deficit of 3 percent of GDP in 2009 and 4 percent one next year. The ministers said that, in order to reduce new borrowing, the new government which is formed after the September 27 elections should implement a planned budget rule for the both federal level and the nation’s 16 states with the objective of bringing the combined budget close to balance.

Thus German Finance Minister Peer Steinbrueck said categorically this week that the government is “not discussing any additional measures” to support the economy, highlighting his concern that public finances may become unsustainable.

On the other hand, concern for the evolution of the German economy in the near term is mounting, and Bundesbank President Axel Weber stated earlier this week that the global economy is “mired in a sharp slowdown.” and as a consequence Germany, which is the world’s biggest exporter, “is particularly badly affected because of declining export demand.”

Finally the forecasts are steadily getting re-written downwards, and the IfW Institute have revised their earlier outlook for a 2.7 percent contraction to a 3.7 percent one. Germany’s worst post- war performance to date had been a 0.9 percent contraction in 1975. Sign of the times, sign of the times.