Don’t Hold Out for a Lasting German Economic Rebound
by Rebecca Wilder
German industry is plugging away. Ending in August, the 3-month average of the seasonally- and calendar-day adjusted volume of industrial production (excluding construction) maintained a quick 8.3% annualized pace. Even if this core measure of industrial activity falls another 1% in September, the Q3 quarterly annualized pace would be 10.5% – a robust acceleration from Q2 (6.3%). This suggests that the German economy quickened in Q3 – does that mean it’s all clear for the Euro area?
I think not.
According to The Wilder View Leading Economic Indicator (TWV-LEI), the annual pace of German manufacturing is set to slow quickly, if not contract, by the end of this year. (I constructed my own indicator since the OECD indicators are generally lagged by two months.) In September, five of the seven components that drive the index confirm a sharp deterioration in economic activity (the final two indicators have not been released yet). This downward trend in TWV-LEI for Germany has been in play since August 2010 and is yet to be fully reflected in industrial production (IP); that will change.
The chart above illustrates The Wilder View’s leading indicator for Germany (TWV-LEI, Germany). TWV-LEI is a composite of the following variables: PMI manufacturing, Ifo business climate index, manufacturing orders, employment opportunities index, inflation expectations, consumer confidence, and the terms of trade. I’ve found that these indices have the highest correlation with current economic activity, which is measured by industrial production. The r^2 of a simple univariate regression of annual industrial production growth on the 5-month ahead leading indicator (annual growth) reveals an 81% correlation – Implied IP is the fitted dynamics of this univariate regression. Unless leading surveys improve dramatically, I expect the German economy to soften much further in coming months.
Using the 1993-2011 time series, the precipitous drop in the TWV-LEI portends a sharp slowdown in German industrial activity, even contraction by December 2011. The implication is that German economic activity, while accelerating in Q3, is likely to contract in Q4.
The policy ramification is clear: It’s going to get a lot more difficult to sell a‘comprehensive solution’ if the leading Euro area economy is in recession.
originally published at The Wilder View …Economonitors
It is going to be interesting. I work for a German company and I asked the usual questions:
– When will you leave the EU??? We won’t leave
– What is the solution??? Spin those countries which are broke off on their own.
The problem is, Germany needs those countries and the Euro. The Euro mitigates the expensive DM when it existed and allows those of lesser means able to buy their product. In the end and without those countries, Germany may find itself in a far worse situation with a smaller EU. My company is placing more manufacturing in the US and Mexico as the dollar is cheaper by 30%. We are busier than anything.
Germany will resist inflating away all the bad loans they made to the periphery.
Eventually, the Germans will see what pharoa learned after he sent the army to get the Israelites back to their slavery.
And the plagues are prophetic allegory for ruining the environment.
I totally agree, that Germany ‘needs’ these countries, both from an export point of view and, paradoxically, for a safe financial haven (no FX risk). How much of your companies production (foreign direct investment) has shifted over the years from within Germany’s borders to another country in the euro area?
I am surprised to hear that you all are so busy. I hear that backorders are slowing down substantially. Perhaps it’s your FDI, which shows up as production in that country, not in Germany’s.
We do have a plant in Romania and one in China besides upstate NY and soon Mexico. I have all of NA Purchasing which covers three facilities including the new Mexico plant. The currency makes it cheaper to build in the US with parts obtained globally. I have 34 projects on our platecovering GM, Chrysler, Tesla, BMW, Mercedes, Opel, Audi, VW, Skoda, etc.
Quite a bit of production is done in Romania. As BMW and Mercedes shifted production to Mexico, Marquardt followed. We are considered a LCC in comparison because of currency.
I can affirm some of this movement back to the US in putting together parts on US soil so to speak in relation to several companies in the rustbelt….in the millions of dollars. One such is the production of the molded plastics next to you as you fly to wherever. Bigger revenues coming down the pike. Interesting.