German Economy Watch

German Business Confidence Falls Sharply In June

2008-07-24T06:26:00.001-07:00

The Ifo institute's German business confidence index dropped 3.7 points from a month earlier to 97.5 in July. This is the lowest in three years, and the biggest one month drop since after the 11 September terrorist attacks. Meanwhile manufacturing and services across the euro area contracted for a second month in July according to the latest PMI flash estimate, with the reading sliding more sharply than expected in July to 47.8 points from 49.3. This was well below expectations which had been for a decline to 48.7, and it was in fact the lowest reading since November 2001.

Ifo indexes measuring current conditions and expectations also fell sharply. The July current conditions index declined to 105.7 from 108.3 in June, below the consensus forecast for a drop to 106.2. The expectations index, which measures sentiment about prospects in the next six months, fell to its lowest level since November 2002, dropping to 90.0 from 94.6 in June, compared to expectations for a drop to 93.3. Thus we have to face the possibility that the eurzone's biggest and most competitive economy may be on edge of a severe and sharp growth slowdown.

IFO themselves draw the following conclusion:

The Ifo Business Climate Index for industry and trade in Germany has fallen again significantly in July following a clear worsening in the previous month. The firms are much more dissatisfied with their current business situation and they are clearly more reserved regarding the six-month outlook. These results suggest that the economic upswing is coming to an end.

In addition Germany's manufacturing sector seems to have put in its weakest performance in nearly three years in July as new orders fell, although growth in the service sector picked upsomewhat. The flash estimate from the Markit purchasing managers index (PMI) for manufacturing dropped to 50.9 from 52.6 in June

On the other hand the services PMI rose to 53.3 in July from 52.1 in June.
Chris Williamson, chief economist at Markit, said manufacturing in Europe's largest economy was at "a virtual standstill", with the index of manufacturing orders slipping to its weakest level in over five years this month.

"Given the order book situation, manufacturing exports and total order books, backlogs of work have fallen for the third month in manufacturing, suggesting there is poor pipeline to drive output in the coming months," he said. "On that basis I would expect output to fall in August and perhaps fall beyond that depending on the exchange rate and oil prices and so forth,"

German manufacturing orders have now fallen for six months in succession, and the Finance Ministry has already said that the economy most probably contracted "considerably" in the second quarter after growth of 1.5 percent in the first three months of 2008.

The decline in German confidence was part of a series of data today suggesting ECB President Jean-Claude Trichet may be too optimistic when he says growth will rebound later this year. Confidence among Italian executives fell to the lowest since 2001 in July, French business sentiment was the weakest since May 2005 and Spanish unemployment in the second quarter rose to the highest rate in 3 1/2 years.

What Is The Recession Risk For The German Economy?

2008-07-19T07:58:00.001-07:00

Christian Menegatti in his Global Recession Watch post on RGE Monitor last week strang together an impressive list of countries which might be at risk of entering recession during 2008. One name which was conspicuously absent from the list was that of Germany. Yet the situation here is not as self evident as some may assume, and one of the aims of this post is to pose the question: just how realistic it is to expect an export dependent German economy to avoid recession when so many of its most important customers - the UK, the US, Spain, Italy... - are either skirting or entering recession even as I write? Indeed Sebastain Dullien implicitly asks this same question in his most recent post here on Europe EconMonitor.

As Sebastian points out there are now a growing number of indicators which suggest that the German economy is not only slowing, but slowing comparatively rapidly. And maybe one indicator here says it all: industrial output. Increasing industrial output to fuel rapid growth in export demand has been at the heart of Germany's most recent expansion, and, as can be seen from the seasonally adjusted output index in the chart below, industrial output has now been declining for three consecutive months (as of May data, released 07/07/2008).

In addition all the main sentiment indicators are now down (including the EU Composite Economic Sentiment Indicator, which came in at 101.5 in June, its lowest level since January 2006). The latest Ifo institute business climate index fell to 101.3 in June (again its lowest level since January 2006) down from 103.5 in May, and the Sentix institute index (released this morning) fell to minus 9.3 from a positive 5.2 in June. That's the lowest since June 2005 and the biggest one-month drop since the start of the index in February 2001.

The GFK consumer confidence index was also down this month, with the forward looking index for July dropping to 3.9 from a revised 4.7 in June. Again this is the lowest reading in quite some time. In particular in their monthly report GFK highlighted how continuing high inflation was eroding income expectations and the consumer propensity to buy. According to the latest flash estimate from the German federal statistics office, inflation is thought to have hit 3.3% annually in June, and if confirmed this will be the largest price increase since December 1993.

German manufacturing orders declined in May, the sixth straight month that orders have been down. Orders, adjusted for seasonal changes and inflation, fell 0.9 percent from April, according to data from the Economy Ministry last week.

And The Real Economy Is Faltering

So much for the sentiment indexes, but what about the real economy? Well if we look at retail sales these were up by 0.7% in real terms in May over May 2007. However, if we look at a longer term time series, we can see that, despite the comparatively positive general economic environment, sales have not been strong for some time now, and in fact they have only registered monthly year on year increases five times since January 2007.

Despite the fact that May saw quite a sharp increse over April - 1.3% in real terms m-o-m sales seem to have contracted again markedly in June according to the last Bloomberg retail PMI reading. The index slumped from May's eighteen-month high of 56.6 to the low level of 44.9 (remember that on the PMIs 50 marks the neutral point, with readings over that level indicating expansion, and below contraction. Looked at this way it would seem sales were contracting almost as fast in June as they were expanding in May).

If we look at the monthly (seasonally adjusted) sales index we find ouselves with a very clear before and after picture, with the sharp pre tax-increase spike in December 2006 being followed by a huge trough in January 2007 following the 3% VAT hike. After that retail sales have never really fully recovered, suggesting that raising consumer taxes may not be as harmless a move as many seem to have thought, and is certainly not the most advisable way to finance the fiscal liabilities presented by population ageing.

If we now turn to industrial production - which, as I say has really been at the heart of the current German expansion - we find that output declined for a third consecutive month in May. Seasonal and inflation adjusted output was down 2.4 percent from April, when it fell 0.2 percent, according to data from the Economy Ministry in Berlin this morning. That is the larges month on month fall since February 1999. Output was up 0.8 percent on May 2007, on a working day adjusted basis.

Manufacturing output was down 2.6% month on month, while construction was up 1% from April, but construction in April was already at a very low level. The seasonally adjusted index peaked in February, and has since been declining, as can be seen in the chart below.

Coming to employment, German unemployment declined in again in June, pushing the jobless rate to its lowest level in almost 16 years. The number of people out of work, adjusted for seasonal changes, fell 38,000 from May to 3.27 million.

And employment is still increasing. There were a total of 40.19 million people employed in Germany in May, an increase of 619,000 (or 1.6%) on May 2007. Compared with April 2008, the number of persons in employment was by 111,000 ( or 0.3%).

Thus the German job creation machine continued to function in May, although at a slightly slower pace than in previous months. From January to March this year, the number of persons in employment each month was by 1.8% higher than in the corresponding month of the previous year, while in April and May 2008 the increase had dropped slightly to 1.6% on April and May 2007. It is too early at this point to decide definitevely whether the current trend can be considered to mark a general slowdown on the labour market. At least part of the slowdown can probably be explained by the fact that the winter months had been unusually employment-friendly because of the mild weather, so that the usual upturn in spring was smaller, although of course this also means that growth in the earlier months of the year was not as stong as appears at first sight.

When looking at the unemployment numbers it is also important to bear in mind that the German labour force is now near its historic peak, and will now steadily decline. An indication of this can be found in the chart below where it can be seen that the rapid growth in the population available for work which characterised the years between 1997 and 2005 has now come to an end, and since 2005 the numbers have been stagnating.

This stagnation in the potential labour force (before an eventual decline if immigration is not leveraged to facilitate growth) is also a reflection of the fact that Gernamy's population is now, slowly but steadly, declining, and has been declining since Q4 2004, as can be seen in the chart below.

The only way to really swim against the stream in these conditions and to continue to achieve sustained GDP growth is by raising labour productivity, but this has been one of the weak spots in the current expansion. Overall labour productivity (price-adjusted gross domestic product per person in employment) rose only very slightly - by 0.1% - in Q1 2008 as compared with a year earlier, although as measured per hour worked, there was an increase by 0.8% (this is because the number of hours worked by those in employment rose much less than the number of persons in employment). The bootom line here is that a lot of the new jobs Germany has been creating are part time and temporary work, often in relatively low value activities.

Exports

The core of the German economy, and the principal driver of its GDP growth, is its export sector. Basically, as a crude first approximation, when German exports do well, the German economy grows, and when they don't it falters. In part this is simply the natural corrolary of the fact that German household consumption has remained congenitally weak. The chart below should make this relative co-movement reasonably clear.

Now in April, which is the latest month for which we have data, German exports continued to grow on a year on year basis, led by demand from countries outside the 27-member European Union. Sales abroad, on a seasonal and working day adjusted basis were up 1.2 percent in April over March, when they had fallen back 0.8 percent on February. April exports rose 14 percent on a year on year basis.

One interesting data point is that during the period January to April exports to countries outside the EU increased 11.6 percent from a year earlier (and by 18% April on April) while exports to EU countries rose 5.8% percent, and to the eurozone alone only 4.6%.

If we go back to 2007, which is the last period for which we really have a detailed breakdown of the export data, about three quarters of German exports went to European countries, and 65% went to the member states of the European Union. The second market after Europe was Asia with a share of about 11%, followed closely followed by the United States, with a share of approximately 10%.

So Europe (whether inside the EU or not) is the key to German growth, and this, of course, is one of the reasons why German exports have been so resilient to the rising value of the euro, since (at least until the problems of the property slowdown started to hit the value of the pound sterling) even those coutries who did not share the common currency (like the UK or most of Eastern Europe) had currencies which had by and large appreciated side by side with the euro itself. Of course all of this has now started to change, the UK has its own problems, and inside the eurozone, Spain and Italy are no longer increasing the volume of German products they buy in the way they were even six months ago.

On the other hand, even as some of the traditional customers have begun to falter, new ones have arrived to take their place to some extent, and in particular here new members of the European Union and Russia. To put things in perspective a little, in 2007, and despite all the talk about the "China factor", Germany exported roughly the same quantity of products to the Czech Republic ( 26,026.6 million euro) - population circa 10 million - as it did to China (29,922.7) - population circa 1.3 billion.

A detailed comparison of relative performance between 2006 and 2007 is even more revealing. Of particular interest is, for example, the fact that exports to China only increased by 8.7% in 2007 while exports to the Czech Republic rose at almost double the Chinese rate ( 16.9%). The importance of United States as an export destination, on the other hand, declined, since exports to the US were down from 78 billion euro in 2006 to 73.3 billion euro in 2007, a decrease of 6%. Exports to Poland (another important destination for German exports with 36 billion euro in 2007) were up 25.2%. Spain was also up considerably (as was Italy), rising from 42 billion euro in 2006 to 48 billion euro in 2007 (up 14.2%). The Russian Federation also stands out outside the EU, with exports there rising from 23 billion euro in 2006 to 28 billion euro in 2007, that is an increase of 20.6%. It is clear that the rate of increase of German exports to Russia has accelerated even further during 2008.

Now the list I have just gone through is scarecly a randomly chosen one. The decline in importance of the United States as an export destination for both Germany and Japan - which are the world's No 3 and No2 economies respectively (and both are CA surplus export-driven economies) - surely has some implications for the whole decoupling-recoupling debate.

Also, the dependence of the German economy for exports growth on Poland, the Czech Republic, Russia, Italy and Spain - all of which may find themselves with economic issues in 2008 of greater or lesser importance - is surely more than a minor detail, and the evolution of the east european and latin economies needs to be closely monitored for what they can tell us about the future path of the German one. At this point it is clear that German exports have been labouring in recent months more under the difficulties produced by the slowdown in Spain, Ireland and the UK than they have been suffering the direct consequences of reduced demand in the US.

Q1 2008 GDP

As I reported in detail here, the German economy started 2008 with what seemed on the face of it to be considerable momentum, since on a price, seasonal and calendar adjusted basis gross domestic product (GDP) was up by a very large 1.5% in the first quarter of 2008 over Q4 2007.

Perhaps rather surprisingly, economic growth in the first quarter of 2008 was primarily supported, not by exports, but by gross fixed capital formation. Compared with the fourth quarter of 2007, investment in machinery and equipment was up by 4%, and capital formation in construction by 4.5%. The latter, it has been suggested, being partly the result of a comparatively mild winter. Overall final consumption expenditure increased by 0.5% q-o-q, the first such rise in over a year, however breaking this down we find that government final consumption expenditure was up markedly (+1.3% q-o-q), while the final consumption expenditure of households showed a rather smaller increase (+0.3% q-o-q). But the big "little secret" of the German Q1 2008 data is that inventory levels were up sharply, and inventory building added a substantial 0.7% points (of the 1.5% total) to growth in the first quarter. Obviously this situation is most likely to be corrected in Q2, and this, together with the steady slowing of general economic momentum, is undoubtedly the reason Deputy Economy Minister Walther Otremba is predicting a contraction in Q2.

Exports continued to grow (+2.4%) but since imports rose even more strongly (+3.5%), foreign trade actually had a downward effect on gross domestic product in Q1 2008 when compared with the preceding quarter. So whatever else the Q1 headline number was about, for once this was not an exports story.

So we can draw two conclusions from all this rigmorole: firstly it would be far from in order to announce the Q1 2008 result as strong evidence for anything very important about the Germany economy or its future trajectory, and secondly, given that the inventory correction is virtually bound to take place (and that early construction momentum has almost certainly not been maintained - construction output was down 2.9% in April over March and by 2.3% over April 2007, and only bounced back 1% in May over April, so was still under the March level) we should not interpret a negative number in Q2 as meaning that Germany is actually entering recession at this point. Global trade is still growing (not as fast as previously, but still growing) and German exports are still sufficiently resilient at this point for this eventuality to be very likely.

For the German economy to enter recession the global economy will need to slow further - which all the signs are that it most probably will do, as country after country falls into the grip of higher inflation and increased central bank monetary tightening.

The important point to understand about the export sensitivity of the German economy is that this is a by-product of permanently weak household demand, which is, in my opinion, associated with the progressiving ageing and numerical stagnation of the German population.

Government Debt

Among the sources of support for the German economy in the coming quarters we should not count on the possibility of fiscal loosening. Germans debt to GDP ratio was 65% in 2007, down significantly from the 67.8% peak hit in 2005, and Germany has been gradually move the fiscal books back into balance (0% deficit in 2007) after four years of breaching the EU's 3% deficit limit (2002-2005). We should not expect any enthusiasm from the German government for hitting reverse gear at this point.

Indeed Finance Minister Peer Steinbrück is forecast this week to unveil a even tighter-than-expected 2009 budget in an attempt to stay on track with the target of completely eradicating the federal deficit by 2011. The draft budget will be put to the German cabinet on Wednesday and is thought to envision total federal spending in 2009 of €288.4bn, up 1.8 per cent from this year. The deficit is forecast to fall by €1.4bn to €10.5bn. The finance ministry’s four-year fiscal plan is said to be little changed from earlier versions and foresees a fall in the deficit to €6bn in 2010 and zero from 2011 onwards despite an average yearly increase in spending of 1.5 per cent.

Forecasts

There seems to be a general consenus at the present time that the German economy is slowing. Where there is no real consensus is over the rate at which it is slowing and where and when the slowdown will settle. It is already clear, however, that GDP growth in 2008 will be below the heady 2.9% annual rate achieved in 2006, or the 2.5% clocked up in 2007.

The median of five forecasts published in June by the major German economic institutes sees growth in the German economy this year of 2.2%. This really now seems a highly optimistic number, especially bearing in mind the economy may in fact have shrunk in the second quarter after expanding 1.5 percent in the first three months, according to the recent statement of Deputy Economy Minister Walther Otremba.

I personally will be very surprised if we see growth at or near the 2.2% the institutes are forecasting (and much less the 2.5% put forward in the now somewhat dated EU commission April forecast, although Eurostat now have a 1.8% forecast pencilled into their database). I even consider the 1.7% from the OECD and 1.9% from Morgan Stanley to be still on the high side given the extent of downside risk and the sort of real economy data we are now seeing.

At the start of the year the German government was reckoning on a growth rate of 1.7 per cent, while Peer Steinbrück is basing himself on 1.2% for the draft budget.

“Now the president of the Bundesbank told the cabinet it might be 2 per cent, to my surprise,” Peer Steinbrück informed the Financial Times in an interview this week. “For my 2009 budget, I estimated growth at around 1.2 per cent, which accounts for all the downside risk ... Some people say it might be 1.4 or 1.5.”

Obviously I am one of the people in question, since I would go much nearer to the 1.4% rate forecast by the IMF in its April World Economic Outlook forecast, and my reasoning would be as follows. We have already had 1.5% growth in the first quarter, but we may have a negative number to put next to it in Q2. Lets make a guess: -0.2%. That brings us back to around 1.3% (its not as simple as this in practice, but bear with me for a second). So then, what if we get, say, a reasonably positive Q3: 0.4% expansion, say. But what then if we get a contraction in Q4? Then everything would depend on the rate of contraction.

Well, there's a lot of guessing going on here, and we will be a little clearer when we get the Q2 number, but the basic structure of the situation is, I think, the one I am suggesting here. Very weak (and possibly negative) growth in Q2 followed by a "bounce back" in Q3, and then a second negative quarter in Q4, a quarter which could well by that point be the first of two consecutive quarters of negative growth, that is the first part of a recession.

In addition all the indications suggest that German consumption will continue to be weak throughout 2008. So if consumer consumption is at best flat, government consumption equally so, and investment and construction weakening, we are simply lefy with export growth, and here the outlook is definitely more negative in 2008 than it was in 2007. So I would say that, based on current data, 1.4% growth in Germany in 2008 looks to be a reasonable estimate at this point, and if there is risk to this call, then I would say that it was mainly downside.

German Producer Prices Accelerate Again In June

2008-07-19T07:26:00.000-07:00

German producer prices rose at their fastest pace in 26 years in June, adding to pressure on the European Central Bank to keep interest rates high even as economic growth slows. Producer prices increased by 6.7 percent from a year earlier, the most since March 1982, after rising an annual 6 percent in May, according to data on Friday from the Federal Statistics Office in Wiesbaden said today.

German energy prices rose 17.9 percent from a year earlier and prices for mineral oil products were 28 percent higher, the statistics office said. Excluding energy, producer prices rose 3 percent. From May, including energy, prices rose 0.9 percent.

Oil has risen more than 70 percent over the past year and reached a record of $147.27 a barrel on July 11. Inflation in Germany accelerated to 3.4 percent in June, the fastest pace in 12 years, and consumer prices in Europe gained an annual 4 percent, the most since 1992.

Higher prices are eroding purchasing power in Germany and curbing growth in an economy already burdened by a stronger euro and the slowdown in Italy and Spain. German investor confidence plunged to a record low this month according to the ZEW Center for European Economic Research.

Germany's Finance Ministry predicts economic growth will slow to 1.7 percent this year and 1.2 percent next, but there are now tremdous downside risks attached to this assessment, and there must be a 50% possibility that Germany will enter a recession sometime this year.

German Investor Confidence Drops To 16 Year Low In July

2008-07-15T03:46:00.000-07:00

German investor confidence fell to a record low in July as surging inflation and slowing export growth started to cloud the outlook for growth in Europe's largest economy. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations dropped to minus 63.9, the lowest since the index was first compiled in December 1991, down from minus 52.4 in June.

As a stronger euro weighs on exports and the U.S. housing slump damps confidence worldwide, Germany's benchmark DAX share index has dropped 7 percent in the past month and 23 percent this year. The dollar fell to a record low against the euro again this morning, hitting $1.6038 at one point. The dollar thus extended this year's 10 percent slide following concern that confidence in the debt of Fannie Mae and Freddie Mac will deteriorate even after the U.S. government pledged support for the buyers of home loans. The stronger euro is putting pressure on German exporters already coping with a slowing global economy. The currency has gained 15 percent against the dollar over the past year, while the crisis in U.S. subprime mortgages has been sending shock waves through financial markets and reducing the outlook for global growth.

German exports declined the most in almost four years in May, as a slowdown in some key eurozone economies (Spain, Italy) and a stronger euro curbed demand. Sales abroad, adjusted for working days and seasonal changes, decreased 3.2 percent from April, the Federal Statistics Office said this morning. That was the biggest drop since June 2004.

Forecasts

There seems to be a general consenus at the present time that the German economy is slowing. Where there is no real consensus is over the rate at which it is slowing and where and when the slowdown will settle. It is already clear, however, that GDP growth in 2008 will be below the heady 2.9% annual rate achieved in 2006, or the 2.5% clocked up in 2007.

The median of five forecasts published in June by the major German economic institutes sees growth in the German economy this year of 2.2%. This really now seems a highly optimistic number, especially bearing in mind the economy may in fact have shrunk in the second quarter after expanding 1.5 percent in the first three months, according to the recent statement of Deputy Economy Minister Walther Otremba.

I personally will be very surprised if we see growth at or near the 2.2% the institutes are forecasting (and much less the 2.5% put forward in the now somewhat dated EU commission April forecast, although Eurostat now have a 1.8% forecast pencilled into their database). I even consider the 1.7% from the OECD and 1.9% from Morgan Stanley to be still on the high side given the extent of downside risk and the sort of real economy data we are now seeing.

At the start of the year the German government was reckoning on a growth rate of 1.7 per cent, while Peer Steinbrück is basing himself on 1.2% for the draft budget.

“Now the president of the Bundesbank told the cabinet it might be 2 per cent, to my surprise,” Peer Steinbrück informed the Financial Times recently. “For my 2009 budget, I estimated growth at around 1.2 per cent, which accounts for all the downside risk ... Some people say it might be 1.4 or 1.5.”

German Exports Fall Back In May 2008

2008-07-09T06:29:00.000-07:00

German exports declined the most in almost four years in May, as a slowdown in some key eurozone economies (Spain, Italy) and a stronger euro curbed demand. Sales abroad, adjusted for working days and seasonal changes, decreased 3.2 percent from April, the Federal Statistics Office said this morning. That's the biggest drop since June 2004.

From a year earlier, exports rose 2.5 percent, today's report showed. The trade surplus narrowed to 14.4 billion euros ($23 billion) from 18.8 billion euros in April. Economists forecast a surplus of 17.3 billion euros. The surplus in the current account, the measure of all exports including services, narrowed to 7.5 billion euros from 15.5 billion euros in April.

Exports within the eurozone were down to 34.5 billion euros in May, the lowest level since September 2007, and only up 0.5% on May 2007. This is obviously NOT an impact from the higher euro, but a knock-on effect of the Spanish and Italian slowdowns.

Now given the structural export dependence of the German economy there is an inherent instability in the situation, ie German growth is more fragile and vulnerable than that of a domestic consumption supported one (like France say), and when the pack of cards folds, then it does tend to fold pretty quickly, which is why I am putting up the GDP and export growth co-movement chart (see below), since I think what we may well now see is a repeat of what happened at the end of 2001, when the sharp fall in the rate of increase in exports send headline GDP swiftly down. Basically not being able to fall back on domestic consumption is a tremendous liability, and again, there can be little fiscal support, if the German administration want to stick by their deficit ending commitments.

German Finance Minister Peer Steinbrück is reported to be about to unveil an even tighter-than-expected 2009 budget in an attempt to stay on track with the target of completely eradicating the German federal deficit by 2011. The draft budget will be put to the German cabinet on Wednesday and is thought to envision total federal spending in 2009 of €288.4bn, up 1.8 per cent from this year. The deficit is forecast to fall by €1.4bn to €10.5bn. The finance ministry’s four-year fiscal plan is said to be little changed from earlier versions and foresees a fall in the deficit to €6bn in 2010 and zero from 2011 onwards despite an average yearly increase in spending of 1.5 per cent.

Likewise I would also stress the high level of inter-locking with several key East European economies, and how developments there are also begining to grind German exports down.

To put things in perspective a little, in 2007, and despite all the talk about the "China factor", Germany exported roughly the same quantity of products to the Czech Republic ( 26,026.6 million euro) - population circa 10 million - as it did to China (29,922.7) - population circa 1.3 billion.

A detailed comparison of relative performance between 2006 and 2007 is even more revealing. Of particular interest is, for example, the fact that exports to China only increased by 8.7% in 2007 while exports to the Czech Republic rose at almost double the Chinese rate ( 16.9%). The importance of United States as an export destination, on the other hand, declined, since exports to the US were down from 78 billion euro in 2006 to 73.3 billion euro in 2007, a decrease of 6%. Exports to Poland (another important destination for German exports with 36 billion euro in 2007) were up 25.2%. Spain was also up considerably (as was Italy), rising from 42 billion euro in 2006 to 48 billion euro in 2007 (up 14.2%). The Russian Federation also stands out outside the EU, with exports there rising from 23 billion euro in 2006 to 28 billion euro in 2007, that is an increase of 20.6%. It is clear that the rate of increase of German exports to Russia has accelerated even further during 2008.

Now Slovakia, Hungary and Romania all reported slowing industrial output for May yesterday. Slovak industrial output growth slowed to an annual 4 percent, Hungary's production rose at what was a reduced pace for them of 4.7 percent and Romanian output growth slowed to an annual 2.7 percent from 13.3 percent in April. Polish output only rose 2.3 percent in May, the slowest rate in three years, while the key Czech Republic is due to report tomorrow with some eagerly awaited numbers.

This data, when put alongside Monday's industrial output data suggests that the German economy may well now be entering a significant slowdown. Basically, Southern Europe sneezes and Germany catches a cold, then the CEE economies cough and you get the full dose of pneumonia.

German Industrial Output May 2008

2008-07-07T03:27:00.000-07:00

German industrial production declined for a third consecutive month in May, offering further evidence that Europe's largest economy is slowing, and reasonably rapidly.

Seasonal and inflation adjusted output was down 2.4 percent from April, when it fell 0.2 percent, according to data from the Economy Ministry in Berlin this morning. That is the larges month on month fall since February 1999. Output was up 0.8 percenton May 2007, on a working day adjusted basis.

Manufacturing output was down 2.6% month on month, while construction was up 1% from April, but construction in April was already at a very low level. The seasonally adjusted index peaked in February, and has since been declining, as can be seen in the chart below.

All the main sentiment indicators are now down (including the EU Composite Economic Sentiment Indicator, which came in at 101.5 in June, its lowest level since January 2006). The latest Ifo institute business climate index fell to 101.3 in June (again its lowest level since January 2006) down from 103.5 in May, and the Sentix institute index (released this morning) fell to minus 9.3 from a positive 5.2 in June. That's the lowest since June 2005 and the biggest one-month drop since the start of the index in February 2001.

The GFK consumer confidence index was also down this month, with the forward looking index for July dropping to 3.9 from a revised 4.7 in June. Again this is the lowest reading in quite some time. In particular in their monthly report GFK highlighted how continuing high inflation was eroding income expectations and the consumer propensity to buy. According to the latest flash estimate from the German federal statistics office, inflation is thought to have hit 3.3% annually in June, and if confirmed his will be the largest price increase since December 1993.

German job creation continued in May, although at a slightly slower pace than in previous months. From January to March this year, the number of persons in employment each month was by 1.8% higher than in the corresponding month of the previous year, while in April and May 2008 the increase had dropped slightly to 1.6% on April and May 2007. It is too early at this point to decide definitevely whether the current trend can be considered to mark a general slowdown on the labour market. At least part of the slowdown can probably be explained by the fact that the winter months had been unusually employment-friendly because of the mild weather, so that the usual upturn in spring was smaller, although of course this also means that growth in the earlier months of the year was not as stong as appears at first sight. So any definitive assessment of the state of the German labour market should be in "wait and see" mode at the present time, although the latest industrial output data make it hard to think that the labour market is not weakening.

German retail sales also fell markedly in June, reversing from the sharp rise posted in May, according to the most recent reading on the Bloomberg retail PMI. The index slumped from the eighteen-month high of 56.6 achieved in May to 44.9. (The PMI measures the rate of expansion or contraction. According to the Federal Statistics Office data retail sales expanded rapidly in May - 1.3% in real terms over April - but now we seem to have an equally rapid rate of contraction going into June).

The rate of increase in exports has been slowing of late, and all eyes must now be on the May data, which is due on Wednesday.

The median of five GDP forecasts published by the German economic institutes in June predicts growth in the German economy this year of 2.2%. This really now seems a highly optimistic number, especially bearing in mind the economy may in fact have shrunk in the second quarter after expanding 1.5 percent in the first three months, according to the recent statement of Deputy Economy Minister Walther Otremba. So while it is early days yet to reach any firm conclusion I would say that the possibility that the German economy will enter recession at some point in 2008 has now risen to over 50%.

German Factory Orders May 2008

2008-07-04T04:02:00.000-07:00

German manufacturing orders declined again in May, making the sixth straight month that orders have been down and adding to signs that Europe's largest economy is now slowing significantly. Orders, adjusted for seasonal changes and inflation, fell 0.9 percent from April, according to data from the Economy Ministry this morning. Orders were down 2% from April 2007.

Domestic orders dropped 2.7 percent in May while foreign sales gained 0.8 percent. Orders from other euro-area countries increased 3.4 percent and demand from the rest of the world fell 1.2 percent in the month. Order growth over the past six months has ``cooled significantly,'' the ministry said in the statement. ``Overall it points to weaker developments in industrial production.''

German manufacturing growth is evidently weakening as near-record oil prices push up inflation and damp the spending power of companies and households just as a strong euro weighs on exports. The European Central Bank raised interest rates yesterday to a seven-year high to combat the threat of an inflation spiral.

Flash estimates for the German PMI at the end of June suggested that German manufacturing weakened in June, although the index reading - which fell to 52.3 in June from 53,6 in May - still indicated expansion.

The German services PMI also saw a decline, falling to 53.3 from May's 53.8 level.

Eurozone inflation accelerated to a 16-year high of 4 percent in June. In Germany, which accounts for about a third of the region's economy, annual price gains reached 3.4 percent, the fastest since records began.

Today's report is the latest to signal that Germany's economy, which so far has coped, is losing its momentum. German consumer, business and investor confidence fell last month. Plant and machinery orders dropped the most in three years in May, the VDMA machine makers association said earlier this week.
German business confidence fell to the lowest in more than two years in June, according to the reading on the Munich-based Ifo institute business climate index, based on a survey of 7,000 executives, which declined to 101.3 from 103.5 in May. That's the lowest since January 2006.

Consumer confidence is also falling GfK's index forward looking index for July 2008, which is based on a survey of about 2,000 people, declined to 3.9 from a revised 4.7 in June.

Also the German economy may well have contracted in the second quarter of 2008 after having expanded at the fastest pace in 12 years in the first three months of the year, according to Germany's Deputy Economy Minister Walther Otremba.

German Retail Sales May 2008

2008-07-01T07:08:00.000-07:00

According to the latest provisional results from the Federal Statistical Office retail sales in Germany in May 2008 were up 3.5% in nominal terms 3.5% and in 0.7% real terms over May 2007. The number of days open for sale was identical in both years.

When adjusted for calendar and seasonal variations, sales turnover was up 1.7% in nominal terms and 1.3% in real terms over April 2008. That is quite a significant increase m-o-m.

Compared with the corresponding period of the previous year, retail turnover was up 2.2 % in nominal terms and down 0.4% in real terms in the first five months of 2008. German sales also fell markedly again in June, reversing from the sharp rise posted in May according to the Bloomberg retail PMI reading. The index slumped from the eighteen-month high of 56.6 achieved in May to 44.9. (The PMI measures the rate of expansion or contraction. As we have seen retail sales expanded rapidly - 1.3% in real terms over April - and now we seem to have an equally rapid rate of contraction going into June).

The monthly index really shows a before and after picture, with the sharp spike in December 2006 being followed by a huge trough in January 2007 following the 3% VAT hike. After that retail sales have never really recovered, suggesting that raising consumer takes in the way may not be as harmless as many thought, and it is certainly not the most advisable way to finance population ageing.

If we now look at the annual index, it seems to be the case that sales peaked in 2006, and since Germany's population is now falling, it would seem to be more than just idle speculation to ask whether German retail sales will ever rise again on an annual basis.

German Employment and Unemployment June 2008

2008-07-01T01:57:00.000-07:00

German unemployment declined in again in June, pushing the jobless rate to the lowest level in almost 16 years. The number of people out of work, adjusted for seasonal changes, fell 38,000 from May to 3.27 million, according to data from the Nuremberg-based Federal Labor Agency released today. The seasonally adjusted unemployment rate declined to 7.8 percent from 7.9 percent in May, while the ILO comparable rate for May (released with one month's delay over the German methodology number) was stationary at 7.4%.

In a separate data release the Federal Statistical Office reported that on the basis of preliminary calculations) there were 40.19 million people employed in May, an increase by 619,000 (or 1.6%) on May 2007. Compared with April 2008, the number of persons in employment was by 111,000 ( or 0.3%).

Thus German job creation continued in May, although at a slightly slower pace than in previous months. From January to March this year, the number of persons in employment each month was by 1.8% higher than in the corresponding month of the previous year, while in April and May 2008 the increase had dropped slightly to 1.6% on April and May 2007. It is too early at this point to decide definitevely whether the current trend can be considered to mark a general slowdown on the labour market. At least part of the slowdown can probably be explained by the fact that the winter months had been unusually employment-friendly because of the mild weather, so that the usual upturn in spring was smaller, although of course this also means that growth in the earlier months of the year was not as stong as appears at first sight.

When looking at the unemployment numbers it is also important to bear in mind that the German labour force is now near its historic peak, and will now steadily decline. An indication of this can be found in the chart below where it can be seen that the rapid growth in the population available for work which characterised the years between 1997 and 2005 has now come to an end, and since 2005 the numbers have been stagnating.

This stagnation in the potential labour force (before an eventual decline if immigration is not leveraged to facilitate growth) is also a reflection of the fact that Gernamy's population is now, slowly but steadly, declining, and has been declining since Q4 2004, as can be seen in the chart below.

Nonetheless employment is rising for the time being, and unemployement falling, although many forward-looking indicators - such as the Ifo institute's business confidence index, and manufacturing orders are suggesting that German growth is set to slow. German business confidence fell to the lowest in more than two years in June, according to the reading on the Ifo index, which declined to 101.3 from 103.5 in May. That's the lowest since January 2006.

The median of five forecasts published by economic institutes last month suggests the German economy will expand 2.2 percent this year before slowing to growth of 1 percent next. This may be rather optimistic, however, and the economy may in fact have shrunk in the second quarter after expanding 1.5 percent in the first three months, according to Deputy Economy Minister Walther Otremba.

The flash purchasing managers index reading showed the employment component falling to 52.8 in June from 54.8 in May and 55.6 at the start of the year. A reading above 50 signals employment is still expanding. Among retailers, the measure fell to 49.8 in June from 51 in May, final retail PMI figures showed.

Germany's Economy May Shrink in Q2 2008

2008-06-24T07:32:00.000-07:00

Germany's economy may shrink this quarter after expanding 1.5 percent between January and March according to Deputy Economy Minister Walther Otremba today.

Gross domestic product ``may even be negative'' in the three months through the end of June, Otremba told reporters in Berlin. Stagnation ``would be a good result.''

As we saw earlier this morning, German consumer confidence fell to 3.9 from a revised 4.7 in June, the lowest in more than two years.

Asked whether the euro's strength against the U.S. dollar is beneficial as it damps rising oil prices, Otremba said the single currency's gains ``are rather negative overall.'' Still, the euro's effect on oil costs are a ``positive side effect.''

And as may be remembered from the earlier data, the German economy started 2008 with what seemed on the surface to be considerable momentum since with GDP (on a price, seasonal and calendar adjustmented basis) rising by 1.5% in the first quarter over Q4 2007 (or an annualised 6%).

Economic growth in the first quarter was supported primarily by gross fixed capital formation, which continued to increase at a pretty rapid clip. Compared with the fourth quarter of 2007, investment in machinery and equipment was up by 4%, and capital formation in construction rose by even 4.5% owing to the comparatively mild winter.

Overall final consumption expenditure, increased by 0.5%, the first such rise in over a year, however breaking this down we find that government final consumption expenditure was up markedly (+1.3%), while the final consumption expenditure of households showed a smaller increase (+0.3%) against. Inventory building, on the other hand, added a substantial 0.7% points to growth in the first quarter. Exports continued to grow (+2.4%) but in fact since imports rose even more strongly (+3.5%), foreign trade actually had a downward effect on gross domestic product in Q1 2008 when compared with the preceding quarter (see chart below).

But the bottom line was that, when we come to look at the components of growth, of the 1.5% increase in q-o-q GDP, nearly half (0.7% points) was accounted for by a growth in inventories, while 0.4% was accounted for by a growth in construction which was in part the result of better weather in January and February and scheduled work being advanced (although you can't simply add these numbers since some of the construction work may well have accumulated in inventories), while the net impact of external trade slowed, and household consumption only accounted for 0.2% points.

So really at the end of the day it isn't really that surprising that some of this added "bonus" should now be clawed back in Q2, and especially when there is the impact of inflation on consumer purchasing to thing about.

The Federal Statistics Office will publish a report on second-quarter German growth on Aug. 14.

Germany GFK Consumer Confidence Index July 2008

2008-06-24T02:32:00.000-07:00

GfK's index forward looking index for July 2008, which is based on a survey of about 2,000 people, declined to 3.9 from a revised 4.7 in June, according to the latest data released by the Nuremberg- based market-research company earlier this morning.

According to GFK spiraling energy costs and the threat of a further massive rise in the price of gas are increasingly dampening the consumer mood in Germany. Both economic and income expectations dropped for the second time in succession, and the same applies to the propensity to purchase. As a result, the consumer climate indicator for July is forecasting a value of 3.9 points after a revised 4.7 points in June. In light of an inflationary trend which seems to be establishing itself around the three percent mark, GfK has downgraded its previous 2008 forecast for private consumption in real terms from 1%, which was based on an anticipated rate of inflation of 2.5%, to 0.5%.

Economic Expectations

After losing almost 10 points in May the economic expectations indicator once again declined - by just under 6 points - and now stands at 7.5 points. However, this means that the indicator remains in the positive range, and is still above the long term average of 0 points. The crisis on the financial markets, which is evidently still far from over, the foreseeable cooling of the global economy, which is bound to hit the USA particularly badly, and fears concerning personal purchasing power are causing consumer optimism to wane. In addition, the continuing strength of the euro is likely to weaken the positive growth dynamic of exports.

Income Expectations

Continuing inflation is also making itself felt on income expectations. This indicator fell in June by over 3 points to its current value of 7.2 points. The last time the indicator was below this level was December 2006. The longer the rate of inflation in Germany remains stuck around the three percent mark, the greater the danger of an anticipated loss of purchasing power on the part of German households. Even the potentially positive effects on private income generated by the rising rate of employment may well be negated by ongoing fears concerning the rising cost of living and high energy prices.

Propensity To Buy

Falling income expectations are leading to a corresponding drop in consumer propensity to buy. After losing 16 points in May, this indicator is once more down - by over three points - and currently stands at -23.7 points, its lowest value since June 2005.

High energy prices and the threat of further drastic price rises, for example, for gas, are consolidating expectations of inflation, which, in turn, is dampening the enthusiasm of German consumers to make purchases. Consumers are assuming that they will have to pay more for energy in the future and that consequently, this money will no longer be available for other purchases.

IFO Business Climate Index June 2008

2008-06-23T06:01:00.000-07:00

German business confidence fell to the lowest in more than two years in June, according to the reading on the Munich-based Ifo institute business climate index, based on a survey of 7,000 executives, which declined to 101.3 from 103.5 in May. That's the lowest since January 2006.

According to IFO in manufacturing the business climate worsened significantly. Firms have scaled back both their current situation assessment as well as the six-month business outlook considerably from May. Expectations fell from a revised 97.2 to 94.7. They expect weaker stimulus from export business in the coming months, but despite the strong euro, they do not fear a slump in exports. Increases in employment will be weaker, according to the survey responses.

German Flash PMIs June 2008

2008-06-23T05:54:00.000-07:00

Flash estimates from Markit Economics suggest that the German purchasing managers index for manufacturing fell to 52.3 in June.

The German services PMI also saw a decline, falling to 53.3 from May's 53.8 level. So both German manufacturing and services are still expanding, albeit at a slwoer pace than previously.

While noting that output had diminished in both services and manufacturing, Markit Economics also highlighted the rising input and output costs due to rising oil and raw material prices.

"German private sector companies signalled that input cost inflation accelerated to a ninety-three month high during the latest survey period, underpinned by the effects of the recent spike in crude oil prices," the report said.

"Meanwhile, output prices at German private sector companies continued to rise robustly in June, with the rate of inflation the second-strongest since September 2000," it continued. "This was led by marked increases in prices charged by firms operating in the service economy."

German Producer Price Inflation May 2008

2008-06-20T02:37:00.000-07:00

German producer-price inflation, which is widely considered to be an early indicator of price pressures in the economy, accelerated to the fastest pace in almost two years in May on energy costs. Factory gate prices increased 6 percent from a year earlier, the fastest rate since July 2006, the Federal Statistics Office in Wiesbaden said today.

Energy prices rose 15 percent from a year earlier and oil products were 25.9 percent more expensive, the statistics office said. Excluding energy, producer prices rose 2.9 percent. Oil prices have doubled in the past year and reached a record $139.89 a barrel on June 16. German inflation accelerated to 3.1 percent in May and consumer prices in Europe gained an annual 3.7 percent, the most in 16 years.

If we look at the comparative consumer and producer price indexes in the chart below, we can see that this is the second wave of increases in producer prices in recent years. The first wave which ended in mid 2006 pushed consumer prices up from a 1% to a 2% increase range. This wave has started from a higher lever and we have moved from a 2% to a 3% range. But we should note that as the rate of producer price increases dropped back after the summer of 2006 the rate of consumer price increases did not accompany it. This is what the ECB wants to avoid happening this time - consumer inflation getting "stuck" around 3%, and that is why they may well raise interest rates at the next meeting in July, despite the fact that the eurozone economies are now generally wilting under the summer heat of the high exchange rate, the credit crunch, and the high cost of energy.

German ZEW Investor Confidence June 2008

2008-06-17T08:32:00.000-07:00

German investor confidence dropped to its lowest level in more than 15 years in June as rising inflation dimmed the growth outlook in Europe's largest economy. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations fell to minus 52.4, the lowest since December 1992, from minus 41.4 in May. A negative reading means that pessimists outnumber optimists.

European Central Bank President Jean-Claude Trichet said this month the bank may raise interest rates in July to curb the fastest euro-region inflation in 16 years. The risk is that higher borrowing costs will exacerbate the economic slowdown. Germany's benchmark DAX stock index has dropped 15 percent so far this year.

Record oil and food prices are reducing purchasing power just as a stronger euro begins to weigh on exports. Oil prices have doubled in the past year, reaching a record $139.89 a barrel yesterday. That helped drive inflation in Europe to 3.7 percent last month, and German inflation to an annual 3.1%. The ECB aims to keep the rate just below 2 percent.

``The economic upswing will clearly lose steam,'' Germany's DIHK chamber of commerce and industry said yesterday, citing a survey of more than 20,000 companies. Economic growth will more than halve to 1 percent in 2009 from 2.3 percent this year and 2.5 percent in 2007, as inflation restrains consumer spending and the euro's gains crimp demand for exports, DIHK said.

The German economy is facing a ``distinct slowdown'' next year as the stronger euro hurts exports and surging inflation damps consumer spending, government adviser Beatrice Weder di Mauro said earlier this week.

Germany's gross domestic product may expand "about 2 percent'' this year even as rising oil and food prices have driven consumer inflation to ``alarmingly high'' levels, Di Mauro, a member of Chancellor Angela Merkel's panel of economic advisers, said in an interview in Berlin.

``In any case, I would expect a distinct slowdown next year'' compared with 2008, Di Mauro said. The five-member panel has not yet given a forecast for economic growth in 2009.

Germany Inflation May 2008

2008-06-13T04:40:00.000-07:00

Inflation accelerated in May in Germany as the cost of oil hit ever higher levels. Consumer prices, according to the European Union harmonised methodology, was up by 3.1 percent year on year, according to data from the Federal Statistics Office. That's slightly above the initial estimate of 3 percent made on May 28. Month on month prices rose 0.7 percent.

Oil prices reached a record $139.12 a barrel last week and European Central Bank President Jean-Claude Trichet indicated that the ECB may raise its benchmark rate by a quarter-point to 4.25 percent next month to contain inflation.

German inflation has now exceeded the ECB's limit of a rate "close to but below 2 percent" for over a year and even the strong appreciation in the euro has failed to offset higher oil and food costs. While the euro rose 8 percent in trade-weighted terms over the past year, oil prices doubled.

The price of fuels rose as much as 12 percent from a year earlier. Diesel jumped 26 percent and the cost of light heating oil surged 57 percent in May, the statistics office said. Food prices rose 7.9 percent compared with May 2007.

ECB policy makers have been becoming increasingly concerned that inflation expectations are on the rise. Expectations, as measured by the so-called breakeven on five-year French inflation-indexed bonds, were at 2.4 percent today, up from 2.12 percent in March.

The ECB currently predicts inflation in the euro region will average about 3.4 percent this year and slow to 2.4 percent in 2009. Economic growth is forecast to slow to 1.8 percent in 2008.

So while economic growth is cooling in EU countries, the ECB remain focused on price stability, and investors now expect the ECB to lift its repo rate twice this year, taking it to 4.5 percent, according to Eonia forward contracts.

However, according to the latest data from the German statistical office wages were rising at a slower rate than inflation in the first quarter of 2008, since employers in the industry and service sectors paid a calendar-adjusted 1.7% more for one hour worked than in the same quarter a year earlier. The two main components of labour costs showed different trends: The increase in gross wages and salaries accelerated slightly to 2.3%. However, non-wage costs declined 0.1%, which had a downward effect. This trend reflected above all the change in the rate of employers’ contributions to the unemployment insurance scheme. As of 1 January 2008, the rate was reduced from 2.10% to 1.65%.

German Exports April 2008

2008-06-09T04:25:00.000-07:00

German exports rose more in April, led by demand from countries outside the 27-member European Union. Sales abroad, adjusted for working days and seasonal changes, gained 1.2 percent from March, when they slid 0.8 percent, the Federal Statistics Office in Wiesbaden said today. Exports rose 14 percent from a year earlier.

Shipments to countries outside the EU increased 18 percent in April from a year earlier. Exports to EU countries rose 12 percent, while imports gained 11 percent.

The German trade surplus widenend to 18.7 billion euros in April, up from 16.6 billion euros in March. The surplus in the current account, the measure of all exports including services, narrowed to 14.5 billion euros from 17.5 billion euros in the previous month.

After the rapid expansion in the first quarter, growth is likely to be "more subdued'' in the second and third quarters according to a Bundesbank statement on June 6. Basically German exports are being given a boost by exports to place like Ukraine, Russia and the Middle East. Exports to other countries withing the Eurozone have now been near stationary since last summer, dragged down I imagine by the slowdown in Italy and Spain.

Manufacturing orders in Germany unexpectedly fell for the fifth month in succession and industrial production declined for a second month, reports showed last week.

Adding to German exporters woes is the fact that the euro has gained around 18 percent against the both the dollar and sterling over the past year, while the price of oil has more than doubled in the same period, topping $139 to set a record on June 6.

German Finance Minister Peer Steinbrueck said in an interview on June 7 that surging energy costs will boost the country's inflation rate more than the government previously expected, draining the purchasing power of companies and consumers. Inflation could be ``around 3 percent,'' he said.

In April 2008, Germany dispatched commodities to the value of EUR 58.0 billion
to the Member States of the European Union, while it received commodities to the
value of EUR 46.3 billion from those countries. Compared with April 2007,
dispatches to and arrivals from the EU countries increased by 11.6% and 11.4%,
respectively. Commodities to the value of EUR 38.5 billion (+10.8%) were
dispatched to the euro area countries in April 2008, while the value of
commodities received from those countries was EUR 32.0 billion (+10.0%).
Commodities to the value of EUR 19.5 billion (+13.2%) were dispatched to EU
countries not belonging to the euro area in April 2008, while the value of the
commodities which arrived from those countries was EUR 14.4 billion (+14.8%).

Germany exported commodities to the value of EUR 31.8 billion to and
imported commodities to the value of EUR 24.7 billion from countries outside the
European Union (third countries) in April 2008. Compared with April 2007,
exports to third countries were up by 18.4% and imports from those countries by
12.1%.

German Industrial Output and Orders April 2008

2008-06-06T06:20:00.000-07:00

Industrial production in Germany, Europe's largest economy, declined for the second consecutive month in April, the second report in as many days to suggest Europe's largest economy is cooling. Output, adjusted for seasonal swings and inflation, fell 0.8 percent from March when it fell 0.8% from February. Year on year output was up by 4.8% but the rate is still considerably down from the strongest points in the current expansion.

Production of intermediate goods dropped 2.2 percent in the month, while consumer goods and construction output declined 2.5 percent and 2.9 percent respectively, the ministry said.

Germany's economy is losing momentum as near-record oil prices push up inflation and crimp company and household spending power, just as a surging euro weighs on exports, and slowdowns in Italy and Spain also act as a drag. The outlook is also far from promising since European Central Bank President Jean-Claude Trichet said yesterday policy makers rather then loosening interest rates may even raise borrowing costs next month to curb record inflation, further damping the expansion.

Annual price gains in the euro area last month accelerated to 3.6 percent. In its quarterly forecasts, the ECB said yesterday that inflation, which it aims to keep just below 2 percent, will average about 3.4 percent this year and 2.4 percent next.

Faster inflation is starting to hurt growth. European retail sales declined 2.9 percent in April, more than three times as much as economists forecast, a report showed earlier this week. German car sales fell 6 percent last month, the VDA auto-industry trade group said June 3.

Adding to companies' woes, the euro has gained 15 percent against the dollar and 17 percent against sterling over the past year, while the price of oil has more than doubled in the same period, topping $135 to set a record on May 22.

Manufacturing orders in Germany also fell for the fifth month in succession in April , figures showed yesterday, the longest streak since 1992, as demand from the euro area slumped. Orders, adjusted for seasonal swings and inflation, fell 1.8 percent from March, according to the Economy Ministry in Berlin. This is the first time since July 1992 that manufacturing orders dropped for five consecutive months.

Foreign manufacturing orders fell 3.8 percent in the month, while domestic orders gained 0.3 percent, the ministry said yesterday. Demand from the euro-region countries slid 5.6 percent and orders from outside the currency area dropped 2.3 percent.

Evidently not all German companies are suffering to the same measure.German plant and machinery orders rose the most in more than a year in April, driven by sales abroad, according to the VDMA machine makers association Orders increased 35 percent from a year earlier, that's the most since March 2007. Export orders increased 44 percent and domestic orders gained 19 percent from a year ago.

``Foreign orders were additionally fueled by large plant orders,'' VDMA Chief Economist Ralph Wiechers said in the statement. ``The order increase of 11 percent since the beginning of the year is a good characterization of the order situation in the machinery sector.''

In the three months through April, orders increased 12 percent from a year earlier, today's report showed. Domestic orders increased 7 percent and foreign orders rose 14percent. VDMA surveys all large German machinery makers and most small ones. Its statistics capture orders at companies that employ 15 percent of all factory workers and account for 13 percent of total manufacturing sales.

Germany Services PMI May 2008

2008-06-05T03:58:00.000-07:00

Euro zone services activity slipped close to contraction in May, in line with expectations, as growth took a sharp hit in France, while inflationary pressures mounted, a key survey showed on Wednesday. The RBS/NTC Eurozone Services Purchasing Managers index fell to 50.6 in May, the same level as the flash estimate and as forecast by economists, from 52.0 in April.

The rate of expansion in Germany's services sector slowed in May, hit by a deterioration in business expectations and firms' worries about rising input costs.

NTC Research's business activity index for German services firms fell to 53.8 from 54.9 in April, holding above the 50 mark separating expansion from contraction for the fourth month running but weighed down by concern about the business outlook.
The figure was marginally above the flash estimate of 53.7.

"May's PMI data point to further solid growth of activity in the German service economy, notwithstanding the ongoing underperformance of the Financial Intermediation sector," said Tim Moore, economist at NTC Economics, which compiles the data. However, the overall business outlook deteriorated in May amid weaker gains in new work and the steepest fall in backlogs for five years."

The business expectations component fell to 48.0 from 51.2 in April, registering the most pessimistic reading since November 2007. This deterioration partly reflected the sharpest decline in work in hand in almost five years, NTC said.

The deterioration in the services sector growth outlook is in harmony with other recent economic indicators from Germany which have suggested that Europe's largest economy is now slowing significantly after a reasonably dynamic first quarter.

Retail sales fell sharply for a second straight month in April and unemployment rose in May for the first time in more than two years. The fall in retail sales raised questions about Germany's ability to cope with soaring fuel and food prices. High fuel and food prices sparked an acceleration in German inflation in May to 3.0 percent from 2.4 percent in April.

The services PMI prices charged component edged up to 53.5 from 53.3 in April. Another on input prices registered 61.7, slowing from 62.7 but holding well above the 50 level separating expansion from contraction.

"Average input cost inflation remained at an elevated level in May," NTC said. "Anecdotal evidence overwhelmingly suggested that sharply rising fuel prices, as well as robust wage inflation, had driven up costs at (panel members') units in May," it added.

Germany Manufacturing PMI May 2008

2008-06-02T04:27:00.000-07:00

Germany's manufacturing sector continued to register growth in May, though export orders fell for the first time in almost five years in a sign the strong euro may well be beginning to hurt, a survey showed on Monday.

The NTC/BME Purchasing Managers index (PMI) was 53.6 in May, unchanged from April. Readings above 50 indicate growth in the sector, below that level, contraction. A preliminary "flash" estimate of the May index had yielded a reading of 53.5.

The survey, which is based on a monthly poll of about 400 companies, showed that manufacturers accelerated new hiring in May, but that growth in overall orders eased.
The PMI's sub-component index for new export orders declined to 49.2 from 51.8, indicating the first contraction in demand, and the lowest reading, since July 2003.

Euro zone manufacturing activity generally cooled further in May as factory output remained near a three-year low even while edging up slightly from the earlier flash estimate. There is also increasing evidence of a widening divergence between the big four economies in the 15-nation currency bloc with Germany and France continuing to prop-up a contracting Italy and a Spain which is in "free fall". This divergence is only going to add to the headaches over at the European Central Bank, which is already pretty worried about the continuing high inflation.

The RBS/NTC Eurozone Purchasing Managers Index for the manufacturing sector eased to 50.6 in May, down from April's 50.7 but above the earlier flash estimate of 50.5.

In a statement, NTC said a further sign that the outlook in Germany had worsened in May was that manufacturers had accumulated stocks of finished goods at the fastest pace in almost seven years.

"The decline in manufacturers' new export orders suggests a key engine of the current growth cycle ... has begun to subside amid pressure from the strong euro and weakening economic conditions in foreign markets," said NTC economist Tim Moore.

Recent economic indicators in Germany have provided a mixed message on the health of Europe's largest economy. The Ifo institute's gauge of business confidence in Germany rose for the fourth time in five months in May, but retail sales slumped for a second straight month in April.

Last month also saw the first seasonally adjusted increase in unemployment in Germany for over two years, prompting some to predict the country's labour market improvement was ending. A resurgence in inflation in May also stirred fears that rising prices would impact negatively on consumer spending, which accounts for nearly 60 percent of the economy.

NTC said the May survey data pointed to strong inflationary pressure in the manufacturing sector, with average input costs rising at their sharpest since July last year.

"A number of companies commented on higher steel and oil-related costs at their plants," NTC said. "Firms responded to the latest squeeze on their margins with a robust increase in factory gate prices, with the rate of output charge inflation only fractionally less marked than April's recent high."