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Economy in Brief

German IP, Risk & Geopolyconomics
by Robert Brusca  March 9, 2011

German industrial output is up in January after two straight months of decline. The rise was sharp and put the three-month growth rate back into positive territory but that rate still shows deceleration from its six month pace and is well below its 12-month pace. Germany's MFG sector has slowed its rise. The construction sector is responsible for a lot of the weakness but IP excluding construction trends show the same general phenomenon, plus they show slightly less momentum over three-months and over one-month they are up by just 0.1%, not 1.8%.

While the German economy is the leading economy in the Euro-Area as this European summit approaches all of Europe's nations need some kind of change. The German expansion is expected to continue and to remain export-led. According to the BGA trade association exports are to grow further in the year ahead; that will depend on keeping growth going in the rest of the zone. BGA sees German exports up by 9% over the year and imports rising by 12%. Obviously BGA also sees German domestic demand picking up, something that has not yet happened.

Geopolyconomical Risks - Debt concerns continue to haunt various EMU member states. Debt troubles in Europe could untrack the German growth machine or at least give it a much bumpier ride. There are many geopolitical risks currently in play that have aspects of pure politics and other aspects of economics. We can call them geopolyconomical risks.

OIL Risk- Events in Libya right now threaten most the Italian economy which has the firmest economic and political ties to Libya. But Libya is also enough of the oil market to drag in OPEC and OPEC is split on what do. The Saudis are pumping more oil to help and Iran is set against it. Iran argues (and maybe rightly) that there is no supply-demand imbalance that the whole thing is about pricing, risk, speculation and fear. Even if this is true you can't buy a refined gallon of gasoline that does not have all these cost elements embedded in the purchase price, one gallon of gas please, hold the geopolyconomical risks! With oil in the mix the risks to growth and stability are up substantially. And the risk is not all because of Libya.

Living with greater risk- With all the democratic revolutions sweeping through the Gulf region it is hard to say what happens next. It is therefore hard to argue that uncertainty will go away soon or that the risk from oil is temporary. The more successful are these democratic revolutions the more people will cross the line from poverty and begin to increase demands for fuel and food stuffs. There is a Big-Picture risk here. Libya is not the cause. It is only one piece of the puzzle and a piece that refuses to go quietly into the night. Instead, it's a piece that is keeping us all awake for nights in a row and in doing so I hope it is also making us think...

Charade of global-theism - Libya has served to un-mask what has been growing view of kumbaya globalism. The G-7 expanded to the G-8 to include Russia, then after the financial crisis we started (trying!) to make policy thought G-20. That's worked well, hasn't it? We have Davos every year and 'everybody who is anybody' comes and mingles. What has this done for us?

Potemkin Globalism - The way that Russia is hamstringing the UN Security Council and the inability of independent strong sovereign nations to come to the aid of the Libya's people should stand as a stark reminder of what little progress we have made. Economic summits and global forums have come to be taken as evidence of the world getting smaller and more cohesive when in fact the real evidence for that is slim. Divisions are as sharp and as pointed as ever. With resource costs skyrocketing the game is getting more, not less intense. The main players as well as market speculators can smell the fear of real scarcity in the air.

The Scarcity Scare - This year's move in food prices may have more to do with bad weather than anything else, but maybe that weather shift is endogenous to a globalism that eats its young and fouls its own nest? Maybe Mother Nature is exacting revenge. To put it more in the lexicon of the day, maybe global warming and/or the greenhouse effects are playing with weather patterns and maybe the sort of thing we are seeing with the weather is not just a series of rogue events but a new reality in the pattern of weather. What if that view is true? We learned very little from the financial crisis as is clear from the inability to enact reforms to close the sorts of loopholes that helped to cause it. So why would we assume that we can deal reasonably with this news risk and shifts in scarcity that really do affect us all and are much harder to attend too and that would require real cooperation and burden-sharing?

The pause that does not refresh - So there are a lot of themes in play and a lot of risk, more that the headlines might let on. As we look at German IP and ponder its future the string of relevant questions takes us very far afield, indeed… as it would for any serious inquiry about any nation's growth prospects today. And we have not even looked at the big enchilada in the Middle East, Saudi Arabia. After the Saudi King returned from getting medical treatment abroad and offered a basket of goodies to try and placate dissent, he then had to outlaw protests. This sort of backsliding when the rest of the region is becoming more democratic is counter-trend and may not prove to be a viable strategy. Saudi Arabia is one place where you do not want to even think about succession. The problem of the high US debt to GDP ratio and large deficits will seem like child's play problems compared to that sort of instability in the Middle East and what it might portend in the way of backlash. And the US has not exactly made a great name for itself in Middle East politics and in its awareness of unfolding events in recent years (months). But Iran too is under pressure so the kind of grass roots movement (or perhaps 'sand-drift movement' is a more appropriate reference) is less controllable and also harder to predict. No 'one' in instigating these protests. Who knows what the map of the Middle East will look in 20 years? And that is something to give you pause.

German Industrial Production
  M/M SAAR
IP Jan-11 Dec-10 Nov-10 3Mo 6Mo 12Mo
Total 1.8% -0.6% -0.6% 2.6% 8.4% 12.4%
IPx Construction 0.1% 1.0% -0.6% 2.2% 8.2% 11.4%
MFG 0.0% 1.1% -0.5% 2.2% 9.1% 13.2%
Food 1.0% -0.7% 1.3% 7.0% 2.9% -0.4%
Textiles -1.9% 1.7% -0.8% -4.0% -3.1% 6.1%
Leather -14.3% 15.1% -5.5% -24.5% 20.1% 19.1%
Cells highlighted in red flag decelerations
Orders-Real 2.9% -3.6% 5.3% 19.3% 12.5% 16.3%
Fgn 1.6% -3.8% 8.2% 25.1% 15.3% 20.6%
Domestic 4.5% -3.2% 1.8% 12.7% 9.2% 11.4%
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