Recessionary Trends in German Industrial Orders And British Industrial Production

October 7, 2008

The volume of German industrial orders rebounded 3.6% in August.  While such a bounce was not anticipated, the trend remains clearly adverse.  Orders had declined in each of the eight previous months and were still 6.3% lower than last November.  Expressed at an annualized rate, German  orders were 7.8% weaker in July-August than their average 2Q08 level, and that drop followed annualized declines of 11.0% in 2Q and 6.6% in 1Q. In the first half of 2008, export orders exhibited much more weakness than domestic orders, but July-August saw somewhat greater relative weakness in demand from home versus from abroad.  The downturn in orders has been pervasive across industrial sectors; such were sharply lower in July-August than in 2Q for producer goods, capital goods, and consumer goods.  August industrial production data, due tomorrow, had been forecast to drop about a half-percent.  Street estimates were reported before the release of industrial orders, which may have been distorted by inappropriate correction for seasonal variation.  A similar distortion may boost August output, too.  Whether that happens, the future trend in industrial production is clearly downward, based upon the weakness in orders.

British factory output and industrial production fell more sharply in August than expected and posted their largest 12-month declines since May 2003 and March 2005, respectively.  Smoothed-out data showed drops of 1.1% in both manufacturing and total industrial production for June-August from March-May.  The three-month declines were twice as steep as incurred between December-February and March-May.  The production sector’s component of real GDP fell in 2Q08 by 0.7% and seems on course to exert an even greater drag on real GDP in the upcoming summer quarter figures.  The stage is set for the Bank of England to reduce rates this Thursday.  Market opinion had been split between a reduction of 25 basis points and 50 basis points.  The similarities between the U.K. and Australia point to a 50-basis point Bank of England rate cut and create some risk of a larger move.  Central banks in both economies have been injecting daily doses of extra liquidity to ease money market strains.  Each economy had experienced prolonged periods of above-trend growth leading to well above-target inflation in spite of many increases in central bank base rates.  Monetary policymakers in both economies had warned of a need for significantly sub-trend growth.  That has occurred in spades, as the eventual drag of the global credit crisis was underestimated at first.  Britain and Australia have relatively elevated benchmark interest rates, being at the opposite end of the spectrum from the Bank of Japan, which has not cut its ultra-low rates further.  Britain’s banking system is in greater immediate danger than Australia’s, as attested by the very sharp declines in British bank share prices overnight.

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