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Economy in Brief

German Industrial Output Now Points Clearly Lower – All Sectors Soften
by Robert Brusca July 8, 2008

The weakness in German industrial output is spreading and cumulating. Consumer goods output is off by 4% Yr/Yr a strong drop for an inflation adjusted series. Capital goods and intermediates goods output are still up Yr/Yr but are slowing sharply. Over three months each of these major sectors is undergoing a compounded negative growth rate that is in double digits. Consumer goods and capital goods output are lower over six months as well.

In the table see also reading on MFG output and orders. These series also show double digit loses over three months (annualized).

Moreover in the quarter to date (April & May) taken over the Q1 average, all major sector growth rates are negative. MFG is down at an 8.3% pace and MFG orders are off at a leading 12.3% pace.

The German Zew and IFO indices have been showing weakness. The EU Commission indices for Germany are weak as well and the EMU-wide indices show gathering downward momentum for the Zone. The Markit (NTC) indices are sharply lower for MFG and Services.

While a lot of Europeans are saying ‘no’ to recession it looks as though circumstances are changing. And that should be no surprise given the wimpy puny actions of the ECB as inflation has run rampant over its target. EMU-wide headline inflation is over 4% and the ECB ceiling for it is 2%. I’d be more forgiving in my assessments if the ECB gave us some new policy direction. I am, for example not very critical of the Fed with the nearly the same inflation metrics in the US. The Fed ‘targets’ core inflation and this is actually still behaving and is within its ‘comfort zone’ on some measures. But the ECB is a stubborn headline inflation targeter and it is way behind the curve yet it is hiking rates by only 25 bp and saying a series of rate hikes does not lie head? How does one makes any senses of that? Especially as Euro-finance ministers were screaming at the ECB for even that rate hike and today they are saying that they never pressured the ECB at all. No, this is not a script for a US day-time soap opera entitled ‘As The World Churns’…

What can all this mean?

It either means that the ECB has lost its mind, or that the ECB is convinced that the strong euro is helping to slow the economy sharply, making a policy to crush inflation now unnecessary and unwise. Yet the 25bp hike was needed to bolster its own credibility with inflation so far out of line. But of course not even the one-mandate ECB can say that. With Germany weakening given its standing the strongest economy in EMU the ECB must find the news of weaker German industrial output as ‘welcome.’ The strong euro is doing its job so that the ECB does not have to do so much itself directly. That means that the ECB may be able to forego any more rate hikes as the weak EMU economy will now do the heavy lifting to abate inflation pressures.

Total German IP
Saar except m/m May-08 Apr-08 Mar-08 3-mo 6-mo 12-mo Quarter
IP total -2.4% -0.2% -1.0% -13.5% -1.7% 0.8% -8.8%
Consumer -1.4% -2.9% 0.8% -13.2% -5.7% -4.2% -14.7%
Capital -3.9% 2.7% -2.2% -13.1% -3.0% 2.7% -4.9%
Intermed -1.8% -1.9% 1.0% -10.2% 1.0% 1.7% -7.9%
Construction 1.1% -3.5% -13.1% -48.2% -0.7% -1.6% -42.4%
MFG IP -2.6% -0.3% -0.3% -12.2% -1.9% 0.9% -8.3%
MFG Orders -0.9% -1.7% -0.5% -11.9% -10.7% 0.2% -12.3%
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