German Economic Slump

May 12, 2009

A slew of horrific monthly economic data will culminate this Friday with the release of first-quarter GDP figures.  Bundesbank President Weber today warned that GDP contracted more sharply than the 8.2% at a seasonally adjusted annual pace (saar) recorded in the final quarter 2008.  That comment actually understates how bad the number will be.  There is a chance of greater negative growth in 1Q than Japan’s minus 12.1% saar in 4Q08.  Weber also said he expects no positive growth in Germany until the second half of next year.  Nonetheless, he remains one of the more hawkish members of the ECB Governing Council with a “what’s done is done” perspective.

German industrial orders sank 46.6% saar last quarter despite a non-annualized 3.3% increase in March.  Industrial production dropped 40.0% saar in the quarter.  Exports fell 42.8% saar, and the trade surplus narrowed 35% to EUR 8.2 billion per month.  Real non-automotive retail sales declined 4.1% saar in the quarter.  The May survey of forecasters by The Economist produced a downwardly revised 5.2% projected growth rate in 2009 followed by +0.3% in 2010.

On the price front, the CPI declined 0.6% saar over the six months between October and April, led by food and energy.  Wholesale prices eked out a 0.1% monthly increase in April, ending a streak of eight consecutive, often big, declines.  On-year WPI inflation swung from 9.8% last July to minus 8.2% in April, the lowest since January 1987, and the WPI fell 18.3% saar over the nine months since July.  Germany’s current account has been much more resilient than Japan’s, with a surplus that figures to remain around 4% of GDP but on considerably lower two-way flows.  The financial press has lately been full of stories questioning Germany’s economic game plan with a huge emphasis on export competitiveness through cost cutting that depresses consumer demand

Neither of center-left nor center-right politicians are offering a significant departure from that blueprint, however.  National German elections will be held in September.  The country has been ruled by a grand coalition of the center-right Christian Democrats with the center-left Social Democrats as a junior partner.  Support for the SDP is very low, but another CDU/SDP coalition is considered the most likely outcome.  Germany would be better served and less prone to legislative paralysis, if the economically liberal Free Democrats replaced the SPD in the coalition, which is plausible.  Much can happen in politics in the space of four months.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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