Monday, January 9, 2012

German economy cooling but without falling into cold rigour

Growth pause. German industrial production dropped by 0.6% MoM in November, from an 0.8% increase in October. On the year, industrial production is up by 3.6%. The drop was almost equally spread across all sectors. Only activity in the construction sector continued its upward trend and increased by 4.5% MoM, from 1.6% MoM in October.

Earlier today, German exports staged a strong comeback, increasing by 2.5% MoM in November. At the same time, imports dropped by 0.4% MoM, widening the seasonally-adjusted trade surplus to 15 bn euro, from 12.5 bn in October. The weaker euro and the unexpected economic improvement in the US has clearly benefitted German exporters.

Taken together, this morning’s data send a strong signal that the Eurozone’s biggest economy has probably shrunk in the final quarter of 2011. Only strong private consumption or an unexpectedly sharp rebound of industrial activity in December could prevent a slight drop of the German GDP. However, a quarter with negative growth might look like a recession but will definitely not feel like one.

Looking ahead, external demand from outside the Eurozone, with the US and Asia providing some positive news recently, and solid domestic demand have made the German economy the last stronghold of a rapidly weakening Eurozone. Nevertheless, the German economy might sometimes look like an island of happiness but it definitely is not an economic island. In the coming weeks and months, there are at least three major risks for the German economy. Obviously, the Eurozone debt crisis is one of these risks. Last developments were a good reminder that the crisis is not over but has rather already entered the next round with more Summits of Truth to come. Moreover, ongoing tensions on the interbank market, balance sheet deleveraging and higher capital requirements for banks have increased the risk of a credit crunch. Don’t forget that the backbone of the German economy, the famous Mittelstand (SMEs), is still highly dependent on bank financing, even if many companies have built up cash reserved over the last two years. Finally, as in the last two years, there is the big unknown: the winter weather. It never touches the economic fundamentals but can easily lead to high volatility.

Today’s numbers show that the German economy is cooling and will probably experience the first shrinking of the economy since the first quarter of 2009. However, it is cooling without falling into a cold rigor.

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