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Economy in Brief

Das Thrill Is Gone? German Orders Go Kaput
by Robert Brusca   November 05, 2010

What goes around comes around... The German economy is going form wunderkind to flop. Its orders that seemed to defy gravity amid ongoing euro-austerity have swung from a gain of 3.5% in September to a drop of 4.0% in September. The growth rates for German orders overall as well as for domestic and foreign orders are negative over three-months and over six months. Das thrill is gone. It looks like the slump is for real this time. The weakness in foreign demand is getting to be too thin even for Germany's well-oiled export machine to exploit.

From insulated to insular: The big drag on the German economy now is coming from where strength used to be - foreign orders. Foreign orders plunged by 6.6% in in September unwinding a 6.6% gain in August. If Germany is left to depend on its own domestic demand, that will be thin gruel indeed as Germany has its own austerity plan in play. For now domestic orders are holding up better than are orders from overseas. But the overseas orders have been the catalyst and the German consumer has not acted as though he is going to carry the economy anywhere fast. The ongoing austerity makes it likely that past performance for domestic orders is not a good indicator of the future. In the future domestic orders will get even weaker without the spur from increasing foreign orders which can have positive multiplier effects on the domestic economy. So what sort of grounding will Germany be for Europe? An anchor of stability, or beached and run ashore at low tide?

On top of this the euro has been strengthening. That is not going to help Germany's or the euro-area's competitiveness.

Hot and cold on Europe - We have been hot and cold for the European area for months. In the wake of the Greece's financial crisis Germany pushed for greater austerity for the European Community and won its point at the G-7 meeting. For a time it may have seemed like a 'good call' as Germany (at least) began to post improved growth results. But austerity is austerity. It is not stimulus. And while we can argue about the long term impact what we have now is a shortage globally of domestic demand. There is no debate about that. And that is where protectionism finds its most fertile ground. A purposeful policy of fiscal shrinkage at this point of the business cycle with the current needs unattended is not in keeping with much that we have learned about economics- putting aside the too-simple criticism of Keynesianism.

The business cycle - The business cycle is a special point in an economy's evolution. Right now contracting fiscal policy is pushing global monetary policies to become too expansive. This is not a good thing. At the same time these policies are beginning to wreak havoc with exchange market conditions (another monetary phenomenon). With global demand already so weak and the size of the trade pie shrinking, shifting exchange rates are causing exporters to taker a smaller share in a slower growing pie. All of this leads to economic tension and fosters instability.

Woe be it to the stimulus of last resort - It is like seeing a movie in which someone slips and falls and you can see it all happening in slow motion but are in no position to help. Fiscal policy is wrong. Too much monetary stimulus may have an impact but it's likely to go wrong even if its starts out with the right effect. The impact on currencies is destabilizing to global trade which has been a big spur to growth. The upshot is that these are very risky times. But if economists can't bring themselves to see anything positive and can only warn of the risk of a double dip, the stimulus being brought by central banks will fall short. It will be ineffective because in order to work, monetary policy needs an environment of confidence not an environment that engenders a liquidity trap. It's as though the central banks are flinging more and more kindling on the 'fire'. But every time they try to strike a match someone blows it out. The winds of pessimism have blown strong. If the kindling ever catches fire it will be a doozie of a blaze. But will it ever?

German Orders and Sales By Sector and Origin
Real and SA % M/M % Saar
  Sept-10 Aug-10 Jul-10 3MO 6Mo 12Mo YrAgo QTR-2
Total Orders -4.0% 3.5% -1.7% -8.5% -4.4% 13.9% -12.4% 6.9%
Foreign -6.6% 6.6% -3.0% -12.8% -6.6% 15.8% -11.3% 14.2%
Domestic -0.6% -0.2% 0.0% -3.0% -1.5% 11.7% -13.6% -1.5%
Real Sector Sales
MFG/Mining -1.3% 2.1% -0.6% 0.8% 0.4% 6.9% -13.3% 4.3%
 Consumer 0.4% -2.0% 1.1% -1.7% -0.8% 1.2% -8.2% 1.1%
 Cons Durables 0.9% -3.8% 3.2% 0.4% 0.2% 7.7% -16.4% 7.8%
 Cons Non-Durable 0.3% -1.6% 0.7% -2.1% -1.0% 0.1% -6.7% 0.1%
Captial Gds -1.8% 4.3% -2.5% -0.4% -0.2% 6.2% -15.8% 3.5%
Intermediate Gds -1.3% 1.2% 1.4% 5.3% 2.6% 11.5% -13.2% 7.6%
All MFG-Sales -1.3% 2.0% -0.6% 0.4% 0.2% 6.9% -13.3% 4.3%
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