Q4 is falling apart before everyone’s astonished eyes, and a “technical recession” beckons.
“Unexpectedly,” German industrial production fell 3.9% in December 2018 compared to December 2017, after having fallen by a revised 4.0% in November, according to German statistics agency Destatis Thursday morning. These two drops were steepest year-over-year drops since 2009.
Even during the European Debt Crisis in 2011 and 2012 – it hit Germany’s industry hard as many European countries weaved in and out of a recession, with some countries sinking into a depression — German industrial production never fell as fast on a year-over-year basis as in November and December:
The declines on a year-over-year basis were broad: Without construction, industrial production fell 3.9% year-over-year in December, after having fallen 4.5% in November. And just manufacturing production, which includes mining and quarrying, fell 4.0% year-over-year in December, after having fallen 4.6% in November.
On a longer-term scale, the industrial production index peaked in May 2018 and has since fallen 4.6%. It is now back where it had first been in February 2017:
And industrial production is not getting a whole lot better any time soon as new orders for the manufacturing sector have plunged – according to data released by Destatis on Wednesday.
New orders dropped 7.0% year-over-year in December (adjusted for calendar differences), after having fallen 3.4% in November and 3.0% in October. In fact, orders have fallen seven months in a row on a year-over year basis in ever larger drops. The chart below shows the decline in each month compared to the same month a year earlier — with a sharp deterioration at the end of the year:
Orders from within Germany aren’t the biggest problem: They fell by “only” 2.6% year-over-year, though it was the fifth straight month of year-over-year declines.
The real problem is this: Orders from foreign countries plunged by 9.7% year-over-year in December, and within that group orders from non-euro countries fell 8.5%, while orders from the euro countries plummeted 11.6% year-over-year in December. It’s the Eurozone again. Note that the chart above and the chart below are on the same scale:
This puts Germany’s fourth quarter GDP one step closer to a “negative growth” number, which would be the second quarter in a row of declines, and thus a “technical recession.” Hopes are resting on consumers and services – but they too have been weakening toward the end of 2018.
The German government has already serially lowered its projections for GDP growth for the whole year 2018 to just 1.0%, after a solid first half. But with Q3 already on the books as a decline and Q4 falling apart before everyone’s astonished eyes, the government’s projection may still be too optimistic.
A big problem within that bunch is the vast and coddled German auto industry — the automakers and their suppliers in Germany. The German auto industry has been hit hard by the plunge in auto sales in China in Q4, and by the serious drop in auto sales in Europe over the last four months of the year. Read… 4 Months of Carmageddon in the EU Wipe Out Gains for 2018
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
China syndrome. Neoliberalism has wiped out the consumer base everywhere it has been implemented. I guess China was the last domino.
So that explains why global GDP of $75.5T (USD) has been growing at 3.5%+ when population has been growing at 1%…?
My best guess is that growth # is due to growth in necessity spending. Things such as health care, housing, energy, student loans, food, etc.. The increase in cost of living necessities coupled with stagnant to slow wage increases has been putting the squeeze on discretionary spending. Perhaps we have reached an inflection point.
Well I have another view:
My best guess is a tiny slice (millennials) of the richest large nation in human history is massively entitled and has highly unrealistic financial expectations. As this cohort ages to 30-40 years old, they are forced to face reality: participation medals don’t matter, and there is no free lunch. In this crowd’s dystopian view, the world has failed them & will momentarily crash down around them.
Post WWII US living standards improved dramatically compared to the rest of the world for 2 fundamental reasons:
1) The USA had a huge head-start: Most of the rest of the “then modern” world was destroyed by WWII. The war killed 3% of global population (about 100M), concentrated in Europe & Asia. The US was an emerging superpower before WWII, and was left as the only intact modern society after the war; then, the US was 5% of global population and controlled 50% of global GDP (as of 2018: US is 4.3% of population @ 24% of global GDP).
2) Education in general and the US GI Bill in particular gave the US a huge productivity boost compared to the rest of the world. Europe was so devastated, the Marshall plan was required to feed people (rationing in Britain lasted to the early 1950s).
Currently, the rest of the world is catching up (and US education has become watered-down). The WWII economic bump experienced by the US will never be repeated (excluding war), and millennial expectations of relative living standards improvement like their parents & grandparents experienced is completely unrealistic.
Javert Chip, do you mean the unrealistic expectation of owning a home, sending your kids to a decent public school and having health care coverage as well as a retirement free of anxiety of poverty? If you can’t have those then why participate in the economy? The economy could totally support all that btw. but policy, incentives and regulation need to change. Get a grip, have some respect for younger folk and stop talking like that, lest there be no one to listen.
Odd choice of moniker. Wikipedia quotes Hugo on Javert as follows: reflective thought is “an uncommon thing for him, and singularly painful” because thought inevitably contains “a certain amount of internal rebellion.” … The profound confusion caused by the realization that the law is not infallible, that he himself is not irreproachable, and that there exists a superior force (identified by Hugo with God) to what he has known plunges him into such a despair that he commits suicide.
Don’t do that.
I wondered why last week brought a flurry of DB/Commerzbank merger speculation. Someone is laying the foundations for Team Germany to ride to the rescue!
Mind you, two wobbly banks do not a strong bank make. The US FDIC have the right idea. Padlocks and chains at close of play on a Friday evening and by Monday morning the wobbly bank has new owners and all the warm and smelly which is clogging up the continental banks books will be dealt with properly. Not good for the shareholders and bond holders, but the problem is dealt with there and then. The ECB can kicking squad could be put in to retirement and the ECB can invest in some new padlocks and chains!! Not before time.
The German banking system is a very peculiar creature that would warrant not merely a piece but a long series of essays.
Suffice to say the ties between the banks themselves, the companies large and small they help fund and especially politics run very very deep, as proven by how quickly and easily the EU approved over the past decade the largely taxpayer-funded rescue packages for a string of ailing regional and local banks.
Deutsche Bank reminds me in some ways of Japanese banks such as Sanwa and Dai-ichi Kangyo after the Zaitech Bubble blew in 1990: it’s too big to fail but also too big to be bailed out outright.
The Japanese government arranged for takeovers thinly disguised as mergers and discreetly provided nearly free funding to help the bank management save face and especially to avoid the endless scandals in which Sanwa, Tokai Bank, Toyo Trust and Banking etc had been deeply involved to fully come to the surface.
Deutsche Bank is in a very similar position, except it has been receiving nearly free funding for years already and that Germany has no Mitsubishi Bank, meaning a huge bank in acceptable shape upon which to unload this hot potato in return for a long series of concessions.
Common sense would dictate breaking up Deutsche Bank but, and here is the main similarity with the failed Japanese banks, this would expose even more scandals to light. So far Deutsche has got away with nothing more than a long series of fines and admonitions, but this near-impunity depends on a political class that’s past its expiration date and will be soon replaced.
Whether the new leadership will be accomodating towards banks like Italy’s or will finally take a harder stance remains an interesting question. Stay tuned.
The Bundesbank should split DB in to a stand alone Retail Bank with its 4500+ branches and €500bn in deposits and ring fence the Investment Bank with its Trillions in derivatives, with the aim of returning the Investment Bank to a support function for German/EU industry, and stop all the “own account” trading which leads to losses and trouble.
The problem with the derivatives is if DB fails or has a “credit event” that may well trigger huge losses which no bank, and many countries could not survive. It is claimed that the derivatives are hedged, but with losses on the scale of the DB Black Hole, will any of the counter-parties survive? In the last “run” on Wall Street it was not so much the Investment banks that were the problem, but AIG who most of the banks relied on as their counter-party.
The other problem of splitting the Retail Bank away is that a large portion of the €500bn+ in depositor funds is funding the investment bank. The Bundesbank would have to pump some €300Bn IN CASH in to the retail bank to restore the depositors funds.
If we need an example of Too Big To Fail DB is it, but at least the Bundesbank can afford to save it, should ECB Rules allow it. Merging DB with Commerzbank is a sure sign of desperation!
Very interesting.
– Germany domestic demand has been slow for a long time. Because since the year say 2001 the government implementred a number of policies that were meant to reduce the german Current Account Deficits of the 1990s. Germany did so by surpressing domestic wage growth. As a result german domestic demand was growing at a sluggish pace. At the same time that sluggish wage growth helped the export sector to become (more) competitive. And then Germany started to run (large) Current Account surplusses again.
– But this policy made Germany (much) more dependent on exports. And those exports are now shrinking.
– What Germany did after the year 2001 was the same what China & Japan have been doing for decades.
– Look at the Baltic Dry Index (BDI) !!!! It plunged as well at a rate not seen since 2008. I also look at the BDI relative to crude oil. Because when oil drops then shipping/transportation costs 9can) drop as well. See what happened in the 2nd half of 2008.
– Perhaps “MC01” can comment (more) on this topic ?
Rates telegraphing a return to QE?
Could the German economic downturn add pressure for a return to QE?
The overnight money market seems to think this is the case.
The 3 month LIBOR rate fixing has fallen the most since May 2009!
The 3-month LOIS (LIBOR – Overnight Indexed Swap rate) has had it’s biggest drop in almost 10 years.
We all know what happened in May of 2009. Saved by QE.
The ECB is already running a QE/NIRP program and regardless of the media hype machine the Fed doesn’t care one tiny bit about the economies of China, Germany and India. It’s not their mandate, something the much maligned Powell takes very seriously.
Euro stock and especially sovereign security markets have been pricing in some sort of massive monetary stimulus since data such as this began to trickle in late last year but they are bound to be disappointed: monetary stimulus is already in full swing and the ECB is highly unlikely to do anything more than slight adjustments to QE (chiefly to help Italy with her latest GDP goosing schemes) until the new leadership is elected.
Expect however the media hype machine to play up any such slight adjustment for all it’s worth and more.
If Germany is in trouble a LOT of countries are in bigger trouble. In fact I can’t think of one that wouldn’t be.
Indeed, smaller EU states are at the same time markets and subcontractors (labour) of German industry and thus form the periphery that’s bound to feel the pain of a significant downturn ahead of the core. So far that has not occurred yet.
But then what says this isn’t just another down of the “regular” business (viz. mismanagement) cycle? Or by trouble you mean something deeper, structural?
Bellwether, yes, but hardly the weak link. Germany is very strongly positioned in all manner of industry and services and can ride out any downturn and swing right back whenever and wherever demand picks up. Who is going to outcompete them?
Also, Europe needs the right kind of stimulus, not this QE banquet fueling misallocation of capital and rising inequality, but programmes providing decent livelihood to masses of young people around the continent.
EU is playing nasty hard-ball with UK BREXIT (admittedly the UK management team is stunningly weak), but UK is a big trading partner for Germany.
For every force there is an equal and opposite reaction. If you do a splendid job of pissing off one of your largest your customers, they just might consider buying somewhere else.
True. The UK is just behind the US for German auto exports. Then there are the German owned plants inside the UK, e.g. Mini (BMW)
I suspect the main urge to punish the UK is not German.
I would agree (it’s the French, whom the Brits literally saved in WWII), but the drunk from Luxembourg, the aptly named Juncker, is siting in (one of) the “presidency” seats at the moment.
It should be noted that exactly zero (0.00000) of the 570 million EU citizens has voted for Junker as EU president. This is a demonstration of the lack of democracy and loss of sovereignty that is tearing the EU apart.
Juncker was appointed by the EU Council of Ministers, and he has never forgiven David Cameron for opposing his election and demanding a vote on Junckers appointment. If my memory serves, the UK and Poland opposed Junckers appointment, the rest of the sheep did what they were told!
I find it the other way round, in that one of the reasons UK is leaving EU is that this (today’s) economic scenario was written on the wall, and has been for many years. EU will now be pushing for a super-mandate of further consolidation for leverage (with or without UK) and that is not what UK is about. The UK has reached the end of a line also and needs a shift, so the result is mutual but not in a friendly sense. Brexit just makes a nice backdrop to excuse some of the future difficulties. I actually think it may become (even more) unpleasant, not between the two sides but within the sphere of each, though Brexit will remain the whipping boy for many. What EU is trying is not sane, and the less so for the nations taking part in it.
Bankers
Agreed. The EU bureaucracy has a life of its own (no electoral mandate required) and will continue to push for less sovereignty.
The thought of Nordic countries & Germays having to pay the debts of Italy, Greece & Spain is laughable.
Britain is a sea power; if anything, they should recognize a sinking ship when they see one.
The debt of the south is income and continued solvency for the north, as that is the flow of production and its finance in Europe. The short of it is that if EU as a whole does not assume the imbalance, then it will not get paid. If no one pays the debt then it is the northern countries that lose that amount, hence they pay for it. Catch 22 with “no exit”, except putting EU in charge and mutualising the account, which is what the ECB is already doing via Target2 in its own way, which Troika did in another.
It is all very deceptive.
What goes round comes round.
Cheaty comes fair.
Oh what an evil web we weave.
Pay back is a bitch.
You get my drift?
Greed, fraud, bonuces and bombs.
Don’t you love it!
Oh oh. Looks like some German exporters got a little too chubby dining out on EUR. Imagine the mess if they were still exporting under DEM.
Exceptionalism proves a temporary delusion.
The solution is obvious: Germany needs to ramp up war spending like America is. But it also needs to make sure it’s weapons manufacturers get a proper cut of NATO spending as probably we think it should all go to US suppliers.
Timbers
Germany currently spends 1.2% of GDP on defense (US spends 4%). For decades Germany(and other NATO members, have promised to increase defense spending to 2%, so Germany (and others) would be less reliant on the US. This “promise” has not been met since WWII.
What ever cute words you have about US & NATO spending are, well, just cute words.
Germany is surrounded by treaty allies or neutral, friendly countries that speak the same language (kind of). The only, even theoretical, geopolitical threat is Russia, and in any event Germany could not unilaterally withstand a determined Russian invasion. Plus, they have nukes. Every extra euro Germany spends on defense is a wasted euro.
We disagree. The 4th largest global economy (Germany) cannot begin to defend its national interests; it’s ludicrously dependent upon the sons, daughters and taxpayers of the United States.
Speak the same [primary] language? I don’t think so: 2 (Austria & Switzerland) speak German, the other 7 speak Danish, Dutch, Flemish, French, Italian, Czech and Polish.
With apologies, I’m way over my 5% comment limit and will have no further comment.
Germany isn’t reliant on US for defence. That’s not at all why US is present there. When has the US military voluntarily left a country it entered? What is the purpose of NATO at this point? Russian threat is so made up. What is the purpose of military spending, beyond stimulus of cronies? Germany is a pretty darn big arms exporter (#5) even with it’s pacifist constitution. If they ever wanted, could shift to churning out weapons systems at alarming rates no doubt. But there is a shortage of reasons. The US model ain’t exactly a fleshy example to follow.
Unexpectedly ? The signs have been there for Months..but hidden from the public. After all why would this made public,it is ” ONLY ” to stop the Public from worrying.
If you jump off a cliff would one be surprised to ” UNEXPECTEDLY ” hit the Ground ?
That’s why I put it in quotes — because that’s how the media put it. I have been pointing out weakness in Germany’s economy since the second half of 2018. Have a look at the most recent headlines:
https://wolfstreet.com/category/all/europe/europe-germany/
Germany should seriously consider a bilateral trading agreement with Britain and dump the Euro.
The UK is lost in the past and everybody just forgot that the past was not a nice place to be, except for the Germans, who are constantly reminded of it whether they like it or not.
Nobody is going to sign anything with Britain right now simply because the British government is currently incapable of upholding an already stated and agreed-upon position. What Putin called “not agreement-capable.”
Instead France and the Germans just signed a cooperation treaty – “Treaty of Aachen” – It’s almost like they are sending a message to someone that was hoping that someone will crack and give a deal …
https://www.politico.eu/article/emmanuel-macron-and-angela-merkel-franco-german-aachen-treaty-tests-european-nerves/
Pretty strong stuff, IMO, France and Germany stating their agreement on the kind of EU they will like to see and work for. This is underreported.
The Donald is not going to like ‘Article 4’ At All, it’s going right along with whatever the European Defence Agency says about developing military and industrial defensive capabilities. So, that’s why the F35 is rejected by Germany.
EDA Link:
https://www.eda.europa.eu/webzine/issue16
Treaty Link: https://www.bundesregierung.de/resource/blob/997532/1570126/c720a7f2e1a0128050baaa6a16b760f7/2019-01-19-vertrag-von-aachen-data.pdf?download=1
“””
Artikel 1
Beide Staaten vertiefen ihre Zusammenarbeit in der Europapolitik. Sie setzen sich für eine wirksame und starke Gemeinsame Außen- und Sicherheitspolitik ein und stärken und vertiefen die Wirtschafts- und Währungsunion. Sie bemühen sich um die Vollendung des Binnenmarkts, wirken auf eine wettbewerbsfähige, sich auf eine starke industrielle Basis stützende Union als Grundlage für Wohlstand hin und fördern so die wirtschaftliche, steuerliche und soziale Konvergenz sowie die Nachhaltigkeit in allen ihren Dimensionen.
“””
Pretty strong stuff, IMO, France and Germany stating their agreement on the kind of EU they will like to see and work for.
Exactly why Brexit needs to happen. There is not one good reason on earth for a sovereign island nation to willingly hand the decision-making levers over to a supra-national power bloc on the Continent. By naively going along with the EU experiment, that’s exactly what they did. It will be costly to remove themselves from it, but the very cost of leaving is evidence of why they never should have been a part of it. Correcting a ghastly mistake is never cheap.
Is the cost of divorce reason not to get married?
US sanctions and pressure against quite a few of Germany’s customers was bound to hurt the German economy.
It’s only a matter of time before Germany and South Korea change sides.
Spain’s industrial production fell over 6% but that only takes it back to the good old days of 2012, and anyway Spanish industrial production is not such the mainstay of the country’s economy . To make up for that British expats in Spain are being warned that on 29th of March between 500 000 and 700 000 of them might become illegal aliens and be liable for deportation – all else currently remaining equal – according to a citizen’s advice bureau. Remember expats didn’t even get to vote on Brexit. Will the new cattle car service be handed to Ryanair, or is this all a BA ploy to gain acceptance after Brexit, it certainly won’t be Germania providing the seats having finally gone bankrupt, leaving passengers stranded and future service to (probably unprofitable) destinations empty.
Stay tuned for the next Machiavelli of crisis news not near (most of) you.
Give people enough rope they will hang themselves. I guess the same could be said about countries. Anyway when the tree falls, watch the monkeys scatter.
Suddenly letting in over a million largely unproductive people diverted resources away from those who are productive. Surely this is a factor.
The US switching from “fair” trade to “reciprocal” trade. Surely this is a factor.
Giving China 50.1% control of all your business investments plus transferring your technology to people who don’t honor agreements. Surely this is a factor.
Refusing to negotiate Brexit because it is an existential threat to the European Union. Surely this is a factor.
On another note…has anyone seen the Mercedes build a van/work truck adds? So far I have seen Oncor and Fedex driving these. Made in America.
Chaos creates opportunity, and chaos is plentiful. Collapse of the German economy and the European economy is necessary to facilitate the emergence of corporate governance by those who have proven themselves to be society’s best and ablest people. The prevailing backwards, liberal democratic social order has only been a temporary aberration of history, and is well on course to be reversed in favor of the far superior historical model, where the great mass of lesser peoples gratefully serve their beneficent, true, and rightful rulers. In the place of uncertainty and struggle there will be guidance and security. The machineries of history are already in motion, as debt, divisions, and despair do their work. Soon enough, and at long last, there will be peace, prosperity, and justice for all, and for always.
/s?
If there is a recession, what happens to all the EU banks that have razor thin capital? A banking crisis ahead?
The Italian banks will lead the collapse and the first to suffer will be the large French banks who own €260bn in Italian debt. The German banks come in at a modest €50bn and the UK is in for €18bn. The French exposure to Italy is worrying because their large State supported banks have problems where ever you look!
The DB issue is trying to keep the lid on their derivatives black hole, but the issue there is simple. Derivatives are a bet on a set of events happening or not as the case may be. Given that some of their derivatives have 20 years to run before DB are off the hook, the majority of their derivatives are pure guesswork, made by analysts and traders who have been paid their bonuses and left the Bank.
Nice work if you can get it, but not much fun for the shareholders and even worse for the German Government who will end up paying for the Chairman’s hubris.
China lives on debt to the mass, the people and the country.
The car sales in China are starting to drop down the tubes, ev or not.
Didn’t Confucius write “Out of debt, out of danger”?