Bleak German Economic Statistics And That's Just a Start!

January 8, 2009

The German economy collapsed last quarter. Total industrial orders plunged 57.6% at a seasonally adjusted annualized rate (saar) in the three months between August and November. Domestic demand for capital goods, a leading indicator for business investment, fell by a similar 57.7%, while total foreign orders tumbled 60.8%. From cyclical peaks in the fourth quarter of 2007, total industrial orders have dropped 24%, with declines of 28.8% in capital goods, 21.1% in intermediate goods, and 11.7% in consumer goods. The comparative resilience of consumer goods makes sense because that sector had not shared fully in Germany’s previous boom, and unemployment had remained in a downtrend through November. However, joblessness increased in December for the first time in 34 months, and consumer spending is slated to perform much worse in coming quarters.

A 10.6% month-on-month plunge in exports was a separate shocker today. Exports had been pretty flat over the prior months, and December’s crash exceeded any monthly decline since the western and eastern states unified in 1990. Between November of 2007 and 2008, exports fell most sharply to countries in the region (by 12.9% to other Ezone members and 161% to nations in the EU but not part of the European Monetary Union, for example Great Britain). Exports to non-EU members posted a 12-month decline of 7.8%.

As Germany goes, so goes Euroland. In the third quarter, German GDP fell 2-1/2 times faster than the euro area economy as a whole. Italy was just as depressed as Germany, and Portugal and Spain also experienced negative growth. Spain reported more than 3 million jobless workers for the first time since 1996 and a 47% increase of unemployment between end-2007 and end-2008. A business climate gauge of the euro area fell more than a full point in December and by about 75% more than anticipated, and such was the weakest reading in at least 23 years. The more widely followed economic sentiment index for the region sank to 67.1 in December from 74.9 in November, 87.5 in September, 94.8 in June, and 99.6 last March. Overall sentiment, industrial sentiment, consumer confidence, and service sector sentiment each set record lows at the end of 2008. Expected price movement among businesses fell 19 points in the nine months between March and end-2008 to -7, while price expectations of consumers dropped 24 points to +7. Economic weakness is also pervasive in those parts of Europe not included in Euroland. Hungary’s industrial production slumped 10.1% in the 12 months to November, and Norwegian manufacturing output recorded a monthly drop of 0.8% in November.

It’s tempting for analysts to run “what if” thought-experiments when economic conditions change as dramatically as such have. What if central banks, including the ECB, had cut rates as rapidly in late 2007 as they did in the fourth quarter of 2008? In hindsight, the run-up of oil prices to more than $145/barrel last summer was the mother of all red herrings, clouding the judgment of central banks until it was too late to avert the terrible synchronized global recession that greeted the new year. The great deleveraging of debt was not exactly an unanticipated event. Investors had been warned countless times to pay attention to unsustainable current account imbalances. Many central banks, including the ECB and Fed, had been warning of a reversal before the summer of 2007, and officials seemed to understand that the process would be disorderly and potentially very traumatic. Well with apologies to MacBeth, “what’s done is done.” Policymakers cannot take back past mistakes. The idea that financial problems could be addressed by liquidity injections and divorced from macroeconomic credit policy was flawed, and so was the assessment of price risks, one raison d’etre, of central banks. That’s all the more reason to get policy right now. This is not the time to hold anything back, which is what the Bank of England appeared to do today. Next Thursday will be the ECB’s turn. The consensus in that instance is also for a cut of 50 basis points to 2.0%, which would only return the key rate to the record low maintained for 30 months to December 2005. That hardly seems adequate. Don’t these times call for a lower rate than seen previously in the 10-year history of the ECB?

Germany is the world’s fourth largest national economy but is a bellwether for Euroland, which is comparable to the United States, where an employment decline for the ages will be reported tomorrow. The German figures today were bad enough to know instantly that the Bank of England should have acted more boldly. Next up, even before the ECB, is the Bank of Korea tonight. Investors look for a cut of 50 basis points. A bigger move than that seems appropriate.

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