“There’s no Reason to Panic” about German Miracle Economy

Declines in Production and Orders Lead GDP

Germany, the largest economy in Europe, the miracle economy that is being held up as example of how an economy should be run, and the all-powerful engine that is supposed to pull the Eurozone out of its deep mire, is sinking into a mire of its own.

When second quarter GDP “unexpectedly” – a word now attached to much of the economic data coming out of that country – declined 0.2% from the first quarter, it wasn’t taken seriously. It was a blip, supposedly. The third quarter would more than make up for it, by some miracle of German efficiency or industriousness, presumably. I called it, “German Economy Swoons.”

Shoes have been dropping ever since. Yesterday, it was reported that demand for German goods dropped 5.7%, the worst monthly drop since 2009. Foreign orders plunged 8.4%, with orders from the Eurozone down 5.7%, but orders from all other countries – and that includes Germany’s two largest and all-important export destination outside the Eurozone, China and the US – down a fabulous 9.9% (made me wonder what the statisticians did to keep it out of the double digits, which would have been utterly embarrassing).

The problem with orders is that they lead export-addicted German GDP: if orders drop, so does GDP, but with a quarter lag. And orders have taken a decided turn south [This Chart Shows How Plunging German Factory Orders Sink the Economy].

Today, another shoe dropped. Industrial production fell 4.0% in August on a monthly basis and 3.0% year over year, after a rise of 1.6% in July, seasonally and working-day adjusted. The worst monthly drop since January 2009.

That these comparisons to January 2009 are suddenly cropping up is unnerving: the first quarter that year, the economy fell off a cliff, with GDP plummeting 4.1% from the prior quarter. No German industrialist will ever forgot those months when orders and exports simply dried up.

The common rallying cry this time around? “There is no reason to panic,” said Andreas Rees, chief German economist at UniCredit MIB.

Energy, which has been on a long-term decline, rose for a change by 0.3%. For the rest, it was dreary: production of consumer goods fell by 0.4% and intermediate goods by 1.9%. Construction was down 2.0%. And production of capital goods, a critical indicator of business investment, plunged 8.8%.

Average production in July and August was 0.7% lower than the average in the second quarter – and that second quarter was that infamous one when the German miracle economy had “unexpectedly” shrunk by 0.2%.

All hopes are now on September. It would have to pull Germany out of its deepening malaise. It would have to be powerful. It would have to crank hard to prevent the economy in the third quarter from continuing its decline. But September already doesn’t look that hot. Markit’s Retail PMI, which surveys 400 retailers about month-to-month changes in retail sales, plummeted to 47.1 (below 50 = contraction), to the worst level since April 2010, unnervingly close to that terrible year of 2009.

“Signaling an accelerated contraction in German retail sales,” is how the report phrased it. Germans are closing their wallets: 39% of the retailers reported year-over-year sales declines. And the mood of German consumers, dour perhaps by nature but which recently had been riding on a wave of near-euphoria, is curdling once again.

With sales falling, retailers did what retailers do: they lowered their purchasing activity in September, after already having cut their orders in August. With “sharply declining” gross margins, retailer profits continued to sag for the 46th month in a row. Yet they’ve increased hiring, in the hope – because that’s all that’s left – things would turn around soon.

The image that emerges with increasing clarity is ugly for the Eurozone. Germany isn’t going to pull out anything. The miracle economy turns out to be an economy like all others where consumers are taxed until they suffocate, where economically important trade partners such as France and China are teetering, and where additional problems, such as the sanctions against Russia, make life miserable for exporters.

And so in the third quarter, Germany’s economy might decline once again. It would be the second quarter in a row of declining GDP. It wouldn’t be an official recession (which takes other data points into account as well), but it would qualify as a technical recession. And then it would take a true Q4 miracle – of which there aren’t any on the horizon just yet – to pull out the year.

The German stock market, which for years soared from record to record regardless of any underlying problems, has rolled over, down 9.6% since its peak earlier this year. And now it even hit the over-hyped IPO market. This shouldn’t have happened. Where is the euphoria? Read…   IPO Mania Collapses in Germany

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  4 comments for ““There’s no Reason to Panic” about German Miracle Economy

  1. LG
    Oct 7, 2014 at 10:17 am

    Wonder if US sanctions against Russia would have anything to do with this?
    Obama you’re one big ₩¥£/=÷÷+!

  2. Dead at 18, buried at 65
    Oct 7, 2014 at 10:48 am

    Well, it seems as though this is what we have all been finally looking for: – The snowball which starts the avalanche! Now, I stipulate that this downturn in the German economy is going to gather momentum, enough to sink the whole of Europe.
    What better time could this have happened? When Russian sanctions are going to come rolling in – on this tide.

    Then, we have the reality of sinking “Deflation”. I would prefer to say “crushing deflation”. To counter the inflationist’s arguments of soon coming hyperinflation.

    Now, I do conjecture that we will see some very strong inflation, in respect to food and energy prices. Especially, when the effects of Russia’s sanctions begin to bite.

  3. Vespa P200E
    Oct 7, 2014 at 12:53 pm

    I was in Hungary, Germany and Switzerland on business 2 weeks ago. I felt less of confidence than the past trips to Europe in April and July. There appears to be this undertone of uncertainty about the all mighty German economy and especially the strong export sector with prospect of re-ignition of the Cold War. Trade with Russia has been growing and lucrative for German industrial machine and slowdown in export to Russia and worse US demand for further trade sanctions sans war in Ukraine (sounds like Ukraine is going to give up the rebel had areas quietly) does not bode well for Germany.

    Germans are also more careful with use of their money (they call it“Tugend”) and I found Germans to bargain and careful on price negotiations. I heard that many Germans eschew credit card all together.

    And if Germany the the economic might that held EU together falters than watch out below!

    • Petunia
      Oct 8, 2014 at 9:33 am

      I can see the trade sanctions being broken as it get colder. They will just exchange goods for gas without going thru the banks.

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