Tuesday, January 8, 2013

German economy remains in contraction territory

Joining the Eurozone’s race to the bottom? Today’s German data sent two main messages: i) the economy has clearly entered contraction territory in 4Q, and ii) the path out of contraction will not be an easy one.

This morning, the statistical office reported that German exports dropped by 3.4% MoM in November, the sharpest monthly drop in more than a year. At the same time, imports decreased by 3.7% MoM, narrowing the seasonally-adjusted trade balance to 14.5 bn euro, from 14.9 bn in October. The November numbers are not a one-off but an extension of the current trend of weakening exports. Since May 2012, German exports have dropped by around4% on the back of a weakening global economy. Today’s data confirmed our view that exports should have turned from driver of growth into drag on growth.

Looking beyond the 4Q, latest positive sentiment indicators, like the prominent Ifo, have signalled a quick rebound of the economy in the first quarter. With a pick-up of global demand, exports could quickly return as the reliable growth driver. However, latest new order data illustrate that the way out of contraction will not necessarily be a straight upward-sloped line. German new orders dropped 1.8% MoM in November, from a 3.8% increase in October. While domestic new orders increased by 1.3% MoM, orders from non-Eurozone countries dropped by 6.5% MoM.

Thanks to its solid economic fundamentals and stable domestic demand, the German economy should not join the race to the bottom many other Eurozone countries are currently in. However, the German economy could end up humming the “things-will-get-worse-before-they-get-better” tune still for some time.

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