I was feeling a little more confident in the German economy after last Friday’s PMIs, but the Bundesbank’s latest monthly report that came out overnight (German only) has put a bit of a dampener on that evaluation.
I ran the summary from the report through the translator and, although it is a bit rough, you can get the overall idea.
The economic performance in Germany is in the final quarter of 2012 is not expected to come close to the level of activity of the summer. After the gross domestic product (GDP) in the third quarter seasonally adjusted still up by 0.2%, the current exhibit in indicators point to a significant decline in overall production at year-end. The current weakness trend is mainly driven by the industry, which has significantly reduced their production recently. This is especially true for manufacturers of capital goods that suffer the severe restraint both domestic and foreign clients on the acquisition of new machinery and equipment. While the demand is for industrial goods from the domestic market and the euro continues downward, recently were significantly more orders from third countries, which was also due to some global settings. Positively true that the export expectations have returned to positive territory. In connection with the improvement of the business expectations, this could indicate that the cyclical weakness could be overcome in Germany soon.
Industrial production fell again in October after an already sharp decline in September strongly at a seasonally-adjusted for 21/2% on the previous month. The average production level of the summer months, which had been reported due to the abandonment of factory closures in some automotive plants an increased level was missed by 3 3/4%. The output of capital goods in October was lower by 6 1/2% than in summer. However, this was not solely due to the special development in the KfzIndustrie, in other capital goods industries, there was also a significant decrease (- 4%). Producers of intermediate goods decreased their production to 2 1/2%, while the production of consumer goods, the average level of the third quarter, only slightly missed (- 1/2%).
New orders for German industry in October after the very weak September, seasonally adjusted value contrast sharply with an increase of 3 3/4% rise. This was the average level of the summer months, exceeded by 2%. The increase, however, focused on the demand from third countries into intermediate and capital goods. Here, also played a role in major orders. However, continued the downward trend in orders from the EMU and from Germany. The orders from the euro below the average level of the previous quarter by 2% domestically-be wore the minus 1 1/2%. Overall, the demand for capital goods rose sharply because of the large orders with 3 1/4%. The orders placed Intermediate goods were slightly higher than those of the summer quarter (+ 1/4%), and in consumer goods, there was an increase of 1%.
The turnover of the German industry in October, both domestic and foreign business-sales abroad declined from the previous month. The average for the summer quarter was missed by a total of 2 1/2%. Particularly strong were the lost revenue with 4 1/2% for capital goods. The turnover of intermediate goods declined by 11/2%, and in consumer goods, there was even an increase of 1%. The value of merchandise exports in October month but slightly higher than in the previous, but was below the average of the previous quarter by 3/4%. In contrast to exports, nominal imports are much higher compared to the previous month with weak 2 1/2%, and compared to the average for the summer months, there was a significant increase of 1 3/4%.
Earlier this month the Bundesbank released an “Outlook for the German economy – macroeconomic projections for 2013 and 2014” (available below) in which it had already downgraded growth from previous estimates made in June. If you look at the following chart from that report you can clearly see that internal demand in Europe is the source of the issue , while the rest of the world is expected to take up the slack.
This chart shows why eurozone non-euro export exposed economies such as Ireland and Germany are performing relatively well in comparison to other euro-nations whose major trading partners have historically been intra-Eurozone. The Bundesbank clearly states this is the reason for Germany’s resilience thus far.
The expansion of real gross domestic product (GDP) in the second and third quarters of 2012, at a cumulative 0.5%, did not fully meet the expectations of the projection published in June.1 This means that, since the sovereign debt crisis in the euro area worsened in the summer of 2011, economic growth in Germany has on average remained slightly below its estimated potential rate of 1 1⁄4%, despite exports continuing to rise markedly. While goods shipments to euro-area partner countries stagnated, deliveries to countries outside the euro area rose by just under 5% in price-adjusted terms. Exports to the United States and to south and east Asian emerging economies were once again particularly dynamic. Without the strong market position enjoyed by German enterprises in these countries, German economic growth would thus probably have been still weaker.
The major assumption in all of this was obviously that not only would the global economy pick up, but the downturn in demand within the eurozone would not worsen further.
Key assumptions behind this baseline scenario are that the debt crisis in the euro area does not escalate further, that the reform efforts are continued and that the adjustment recessions in the euro area come to an end soon. Under these conditions, confidence can be expected to gradually return. The exceptionally favourable financing conditions would then enable businesses to lift their investment levels.
I personally think that is a very bold assumption and has been the major failing of the “eurozone plan” all along because it ignores the feedback effects from attempts at supra-european fiscal tightening. It would seem from the Bundesbank’s latest assessment that this assumption is now coming under pressure which could suggest that the latest forecasts are going to be tested on the downside.
Like most Eurozone official organisations the Bundesbank is predicting that, although their forecasts have been continuing overly optimistic in 2012, the new year will see an end to the downwards cycle as the rest of the world begins to grow again. As I said in the PMI post this is certainly possible, but these forecasts appear to ignore the new round of fiscal tightening coming to Europe in 2013. That’s not to say that the rest of the world can’t drag Germany out of the economic quagmire, its just that I believe their will be some stronger forces from inside the eurozone dragging them back in.
Hopefully I’ll be wrong on that call.