What is happening to the German economy? Slowing,stop, retreat?

One of the stereotypes of the credit crunch and Euro area crisis has been that the German economy has been like an economic locomotive, soon covering the ground lost and then powering forwards. From the point of view of the Euro area crisis this could be seen in several ways. The first is that at least someone looks as though they are recovering and moving forwards. The second is that somewhat ironically German economic success exacerbates the divergence between economic performance in the Euro area as opposed to the promised convergence. The third is even darker with the implication that policy has been set for German economic success which does not coincide with the needs of other Euro area economies.

More recently though we have been seeing signs that the locomotive has slowed down and looks as though it will stop and maybe back up a little. What is happening?

Today’s data

Balance of Payments

This is the heart of German economic performance where surplus invariably follows surplus but November’s figures released today were a disappointment.

In November 2011, the surplus had amounted to 16.1 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 14.6 billion euros in November 2012.

So the surplus was down on a like for like basis and if we look at why this is so we find something interesting but not unfamiliar.

Commodities to the value of 35.0 billion euros (–5.7%) were dispatched to the euro area countries in November 2012, while the value of the commodities received from those countries was 34.8 billion euros (+1.1%)

So we see a clear cost to the German economy from the Euro crisis although she is helping her colleagues a little. We can also see that there was a sharp export fall to that area which contrasted with a rise in exports to countries outside of Europe which rose by 5.6%.

Also if we compare November to October we see that the German economy looks as though it is slowing and at a fair lick.

After calendar and seasonal adjustment, exports decreased by 3.4% and imports by 3.7% compared with October 2012

Care is needed

Monthly trade figures are an unreliable source but what has been evidenced here is not out of line with other reports. Also if we look back to the figures for 2012 as a whole we see that exports to the Euro area have dropped by 1.7% so we are seeing an addition to an existing event rather than a outright change. If we look back to the composite purchasing managers index for November it was at 49.2 showing the seventh month of contraction in a row. So the numbers are consistent. Indeed if we look forwards on the basis of those numbers we saw this for December too.

with export sales to clients based in Europe continuing to disappoint according to panellists

What about the fall in imports in November?

This is intriguing as on its own it implies that German domestic consumption is dropping. However as stated above monthly trade figures need backing so let us see what the German Bundesbank thinks could have happened at the end of 2012.

stagnation or even a slight decline in gross domestic product (GDP) in the final three months of the year

Usually central banks are very loath to predict such things. Also I note that they felt that German economic activity would be bolstered by this.

By contrast, economic activity continues to be bolstered by housing construction, which is benefiting from favourable financing conditions, a lack of alternative investments and the heightened uncertainty, as well as from private consumption, which remains on an expansionary course owing to substantial gains in real income.

Okay how is that going?

Today we have received the latest Markit purchasing managers index for the German construction industry.

The downturn in German construction activity gathered pace at the end of 2012. Total output fell at the fastest rate since February, in part reflecting a further decline in the level of incoming new orders.

So a completely different story is being told here as the index has dropped to 43.3 from 48.4 in November and this gave us.

That signalled the ninth straight monthly decrease in total building activity in Germany.

So as you can see the data here directly contradicts the view of the German Bundesbank. Frankly they could not be much more apart! Also if we try to peer into the future we see this.

Constructors meanwhile maintained a negative outlook regarding growth prospects for the sector in the coming year

Retail Sales are weak too

If we look at the numbers for the overall Euro area we see that November 2012 disappointed compared to the year before.

In November 2012, compared with November 2011, the retail sales index dropped by 2.6% in the euro area

Interestingly total Euro area retail sales are now weaker than in 2005 as that is our base year of 100 and the November reading was 98.4.

If we look at Germany specifically we see that retail sales in November were 0.9% lower than in November 2011 and that this follows on from -2.8%,-0.9%,-0.7% and -1.2% in previous months on the same basis. So a weak trend which means that the underlying figure on a seasonally adjusted basis is now 97.6 in Germany which is not quite what you might have expected.

Today’s surveys

The Euro area economic sentiment indicator improved in December to 87 from November’s 85.7.

Economic sentiment in the euro area improved among consumers and across all sectors, except retail trade.

However as the base or long-term average is 100 we can see that amongst the media spin another month of contraction is shown here albeit at a slower rate.

We also have received similar numbers for the Euro area Business Climate Index.

In December 2012, the Business Climate Indicator (BCI) for the euro area increased slightly by 0.05 points to -1.12.

So another improvement but a continued decline.

Financial Markets tell a different story

Here we see in many respects yet another disconnect between what these are telling us and what economic reality looks like. For example the German Dax equity index is up over 27% on a year ago at 7725. Also whilst they remain very low her bond yields have risen,following the international trend in 2013 so far, with her benchmark ten-year yield now being 1.52% which is up 0.22% over the past month.

So on that basis alone you might be expecting some economic growth.


We see from the data that Germany’s economy has slowed then stopped and may even be reversing right now. If we look at her employment trends we see that as of the middle of the year employment growth was slowing which was not a good sign either.  Such thoughts are reinforced by the numbers for German factory orders in November which have been just released and show a month on month fall of 1.8% and a year on year one of 1%.

So she enters 2013 in an unusually poor state in economic terms. She is receiving a stimulus from the activities of the European Central Bank which has boosted the narrow money supply particularly. But as ever we await to see whether this will have an impact on output or will be frittered away via inflation or perhaps leak into equity and commodity markets. For the Euro area as a whole this is a big issue because if Germany catches a cold…..

This entry was posted in Euro zone Crisis, General Economics, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, Yield and tagged , , . Bookmark the permalink.
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  • Anonymous

    Hi Shaun,

    I’d suggest that Germany has several regional economies – places with strong export industries ( Bavaria & others ), others with demographic decline where there are towns with many empty houses and the former GDR lander with huge unemployment (I’ve read that Poles are now living in Germany and commuting to jobs in Poland to get cheaper housing). Housing investment only makes sense in the first regional type, with Munich (for example) seeing huge house price increases.

    An economic principle – profit can be enhanced by productive investment. Germany has recently squandered much money in buying US MBS’s and loans to Greek, Spanish, etc banks. Money directed to various EC “rescue funds” like the ESM and EFSF cannot be classed as productive investment either. Therefore I am not surprised that the German economy is struggling while huge rewards are delivered to unproductive failing banks and bankers.

  • forbin

    And Thus the great European experiment continues to strangle the German Golden Goose .

    The Germans cannot afford to bail the the rest of Europe out – too big a debt problem

    mind you do these figures mean they ‘ll be embarking on a fevered housing boom a la UK – with the same dire results ? ( house prices too expensive ) or a la Spain ? ( too many houses – valued at too higher cost ? )

    I agree with ExpatlnBG . they’ve throw a lot of money away here, I wonder if the German Electorate really know whats going to hit them……


    PS: interesting isn’t it? popcorn ready for 2013 !

  • JW

    I think regional variations applies to every country. In Europe all the adjoining areas of countries next to Switzerland are doing relatively better than elsewhere. Not surprising given the pump-priming leaking out of the SNB.

  • jw

    Hi Shaun
    2012 saw a real increase in average German wages and they expect a small increase again in 2013. There is an almighty row going on about whether this is/will undermine the great German industrial machine.

    Its a very very small step in adjusting the relative productivity gap across the EZ totally dwarfed by the drastic effects in the ‘sunshine belt’.

    If retail sales are not increasing where is the money being spent? Some of it is supporting an increase in domestic house prices, but I would have a small wager that quite a lot is supporting a different house investment location; Florida and Arizona. In selective areas of these States there has been renewed investment and a lot of it is from ‘overseas’. If you look at the names of new agencies etc they have websites in German.

  • Anonymous

    The Swiss pump priming is very recent – it cannot be credited for boosting Bavaria (home to BMW & Audi), Baden Wurttemburg (Mercedes Benz). It’s investment in quality & innovation to build products that command a price premium.

  • pavlaki

    Very interesting figures! Certainly the Germans determine that the interest rate and the value of the Euro shall suit Germany first and foremost – which of course is diametrically opposed to what the south of Europe needs. If they want the south to grow they are going to have to live with higher inflation (or at least the risk of it).

  • Anonymous

    I guess the German property investors fear inflation and worry about monetary stability. Property is an inflation resistant investment.

    The German planning system is less restrictive than the UK, so anybody can acquire land for their own home. (Self built or done by a small local builder) This reduces the demand for houses built down to a price by large developers, which in turn should prevent an oversupply a la Spain. Also the German banks are unlikely to authorize risky lending – given hindsight of the Spanish problem. –
    Therefore I’d guess the risk is high prices localised in areas of high employment (a la London)

  • Anonymous

    Is the euro an unrealistic project ? Is a single interest rate workable ?

    Banks have loaned too much money to some southern European countries. Greece is insolvent. Spain’s banks appear to be hiding their insolvency. The EC approach is to deny the possibility of separate currencies and to insist the Northern European taxpayers pay the debts of the profligate and probably corrupt Southern politicians.

    There are other ways of resolving the Greek problem. Greece could default on bonds and retain the euro or default and exit currency union. Greece could reclaim assets from enormously rich politicians (and others) who cannot prove how they acquired their assets on their declared taxable incomes.

  • JW

    I was making the observation that other countries have regional variations and co-incidentally ( or not) , France and Italy have relatively bouyant regions abutting Switzerland. They always tend to be, but the Swiss wealth leakage hasn’t harmed them.

  • JW

    Germany’s public debt is at about the average EZ level ,82%, which is considerably below the level of the US. Whilst Germany’s exports over the last 15 years have increased substantially the overall GDP has risen less than that of France, UK and a lot of other EU countries. General wage levels and standards of living have remained flat for 20 years for the majority of Germans. Why? Because so much of Germany’s exports to other EZ countries have never been paid for. They exist as credits in the Bundesbank’s balance sheet, so in essence the Bundesbank is supporting German exports with public money. As the ECB creates more liquidity , the more the German people pay, but the elite in Germany just like everywhere else get richer and richer.

    Its Germany’s own 0.1% who are ripping off their own people under the mirage of an export-led economy.

  • Anonymous

    That is nonsense, I’m afraid. The Bundesbank’s claims on the ECB in the Target2 system are the balancing item for real money actually received by private sector banks as payment for exports and repatriation of foreign deposits. To say this amounts to monetary financing of German exports is simply wrong and shows a lamentable lack of understanding of how RTGS settlement through the Eurosystem works. I don’t want to explain it here, but I suggest you read Karl Whelan or Beate Reszat on the subject of how Target2 works.

  • JW

    Payments for exports from Germany to say Spain are held as credits by the Bundsbank from the Bank of Spain. The net total of Target2 is indeed a net of debits and credits, it currently is a credit of over €700bn held by the Bundesbank.
    This is the second thread you have used ‘rude’ language like ‘nonsense’ and ‘lamentable’. I didn’t realise this blog was an excuse for you to prove how much more clever you are than a mere ‘amateur’ trying his best to make sense of this crazy world. Perhaps you would like to engage a portion of your brain labelled ‘humble’ before hitting the keyboard in future.

  • Midge

    When your head is spinning with the unbelievable amounts being thrown at the world’s economies(banks) along comes talk of a trillion-dollar coin.Now that’s the answer to all the problems.

  • Anonymous

    West German living standards remained flat or even dropped. East German living standards have increased hugely, Eg no more queuing for bread.

    German wealth statistics and debt have been muddied by reunification and the enormous wealth transfer from the west to the east.

    This redistribution has not bought enough employment to the east. Worse still, Poland is attracting more FDI than East Germany and creating more employment.
    I would suggest that tying the Ostmark to the DMark has not helped East Germany to develop a successful economy with high employment rates, and that a lower value Ostmark could have helped spur FDI and job creation. Is there a lesson for the eurozone here ?

  • forbin

    Hello Midge,

    That nudged a brain cell – wasn’t there a film about the million pound note – old black and white one …..

    How inflation has affected everything!

    perhaps we need a Quadrillion pound note instead ….


    ah here it is – “http://en.wikipedia.org/wiki/The_Million_Pound_Note”

  • JW

    The links below describe the contrary views of TARGET2. The second quotes Whelan extensively.



    Leaving aside the technicalities of double entry accounting, I think the major difference of view is the effect on Germany’s ‘currency’ and inflation if the increasing public debt obligations as a result of the TARGET2 credits were met internally.

    My opinion is that whilst the exporting institutions , whether they be companies or banks are held intact by the Bundesbank, the resultant public debt obligations and inflationary effects will as usual be dumped on the ordinary taxpayer. To believe this could unravel by simple accounting write-offs is I believe naive and therefore I don’t think Whelan’s arguments are sound.
    But I repeat, that is only my opinion, far more knowledgeable commentators seem to have widely differing views.

  • forbin

    “..that the mere existence of the note will enable the possessor to obtain whatever he needs….”

  • Anonymous

    Hi ExpatInBG
    I can see you have plenty of replies but let me just add that a lesson of the Euro crisis has been to remind us of the regional nature of all economies and the compromises and transfers which take place. I can’t think of a homogenous country….

  • Anonymous

    Hi Midge

    Well until they need a 2 trillion dollar coin etc…! Or 3,4 5 …
    Seignorage is a powerful and valuable tool but within limits.

  • Anonymous

    Hi Forbin
    Gregory Peck I think was the star and the possession of it meant he then didnt need to spend anything as he then was given all he wanted. How times change! The amount I mean not the principle which I am sure applies at least in part for some.

  • JW

    Hi ExpatinBG

    A lesson indeed. The ‘savings’ of the West went East in capital exports to the ‘East’ . Then over the last decade the majority of German ‘savings’ has been exported ‘abroad’ mainly to the periphery. Leaving less than ‘normal’ for internal growth. Inflationary growth in the periphery balanced by relative depression in Germany, disguised by a positive balance of trade. More of the same is likely to have the same result.

  • Anonymous

    Hi JW

    Yes I had spotted the numbers on the German Statistics website which did give a bit of food for thought. After a dip to an annualised fall of 1% in mid-2009 they moved into positive territory in 2010 and 11 according to its chart . Germany doing its bit? We will have to see how this plays out this year.

  • Anonymous

    Once again you resort to ad hominem attacks on me rather than considering what I actually wrote. I was not rude to you personally: I criticised your comment, that is all. it is not “rude” to describe something that is completely wrong from beginning to end as nonsense. But you have once again been extremely rude to me.

    I am sure if Shaun did not like the tone of my comments on this site he would tell me so. And I will continue to comment on this blogsite as long as Shaun is happy for me to do so. If you don’t like that, frankly that is your problem, not mine. As I said before, you need to develop a thicker skin – and accept that you may, just occasionally, be wrong, and that people are not being rude to you when they point this out.

    It is the ECB that stands to take losses in the event of a country leaving the Euro, not the Bundesbank. The question is whether the ECB would then require recapitalisation – and that depends on your view as to whether technical insolvency in a central bank is a problem. However, recapitalising the ECB would be a joint responsibility of the entire Eurosystem, not just Germany.

    I have previously read all the links you have provided and a good many others too. I really do strongly recommend you read Beate Reszat on this subject. I would say she has the best actual knowledge of how this works and takes a balanced view.

  • JW

    I will keep this short because I don’t like these sort of comments on Shaun’s blog.

    Your comments re the ECB demonstrate that you didn’t either read my comments or understand them prior to jumping to write ‘nonsense or lamentable’. Of course you are completely entitled to your opinion/views, but so am I. From what I have read there are many commentators who share my opinion and many that share what I think are yours. Quoting names of university economists doesn’t make your view any more ‘right’. Economists as a bunch are pretty incompetent when trying to explain what happens in the real world. Their training is to blame. Compared to physical scientists they are still in the 19th century, they have no idea of how to explain/model dynamic , chaotic events. Unfortunately that means that most ‘events’ come as a big surprise to them.
    Lets just agree to disagree and in future I will try not to comment on your views in case it starts another ‘disagreement’.

  • JW

    And here is one that very politely disagrees with Reszat


    including the statement ‘ If the Bundebank loses its TARGET claims, it is a loss for the whole nation.’.

    Pays your money takes your choice.

  • Anonymous

    On the contrary, I read your comments and understood them. And I gave my opinion of them. You are entitled to your opinion/views, and I am equally entitled to say that your opinion/views are factually wrong. Unfortunately you interpreted that statement as a personal attack, which it was not, and you responded in kind. You’ve just come out with a whole lot more opinions/views that I don’t particularly agree with, but as every time I disagree with you you accuse me of arrogance, I’m really not interested in debating with you.

  • Anonymous

    Agreed. I looked at how Poland’s low exchange rate, cheap labour from the early 1990s has slowly spurred people to make productive businesses and created gainful employment. In contrast the former GDR lander received huge subsidies while using a “foreign controlled” hard currency that kept wages and living costs disjointed from local productivity. This causes mass unemployment.

    I suggest that Greece is repeating the same mistake – they are using a hard “foreign controlled” currency that is not matched to local productivity and/or consumers means.

    If my theory is correct – eurozone Greece will continue to have high deficit and high unemployment for many years. Grexit and devaluation seems a better choice.

  • JW

    Using words ‘nonsense’ and ‘lamentable’ is not ‘giving your opinion or disagreeing. Its a clear attempt at a ‘put down’. You are a very disagreeable arrogant poster.

  • Anonymous

    Well, if you want to interpret it that way that’s up to you, though I think you are way too sensitive. But the ad hominem attack count is considerably higher on your side than mine. You were rude to me on my very first post at this site – which was not even addressed to you. “Disagreeable arrogant poster”? Look in a mirror.