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.
Comment
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…..
