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Economy in Brief

German Orders Show Great Resiliency
by Robert Brusca  April 6, 2011

Orders are strong and resilient- German orders are proving to be quite resilient, as the chart shows the growth in both domestic and in foreign-sourced orders have each remained at a pace that continues to exceed their growth of the entire pre-recession period. Order growth is not just 'back' it is on fire. Domestic and Foreign orders volumes are back to about 92% of their respective pre-recession peak values. While both domestic and foreign order growth rates are in discernible downtrends from their respective expansion growth peaks, those trends are so mild that the pace of growth continues to run well –have of the two series' precession pace. Domestic orders have cooled and reignited. Foreign-sourced orders have simply run at a high pace with little erosion in the overall pace.

Various measures of consistency in strength- For example foreign orders are up by 24.1% over 12 months and were up by 28% over 12-months for the period 12-months ago. Similarly domestic orders are up by 16% over 12-months and one year ago their 12-month gain was 18.9%. These are consistently high rates of growth. All manufacturing sales within Germany have risen by 13.5% over 12 months and were up one year ago by 8.1% over 12-months. So both domestic MFG sales and German orders data show solid and strong growth and trends.

Current quarter - In the current quarter-to-date domestic orders are taking the lead rising at a 22.9% pace with one month left in the quarter; this compares to foreign orders at a 14.7% pace.

Are foreign orders losing momentum for real? - The slowing in foreign orders reflected in the weaker quarter-to-date growth numbers stems either from the erratic nature of foreign orders or from a slowdown which is just showing its hand. German foreign orders fell by 3.9% in December but have since rebounded growing by 1.7% in January and by 2.3% in February. But that last two month's-worth of growth has only just made up for the December plunge, leaving orders unchanged over three months, on balance but not on any other time frame.

Volatile is not the same as weak- It is too soon to tell if this is a real slowdown or just some monthly volatility. Over the past year or so foreign orders have displayed about twice the volatility of German domestic orders. So it is premature to call this three-month result for foreign orders a slowdown especially given the recent history of this series.

The German...situation - German data continue to be strong and by some reasonable gauges the economy could be deemed to be overheating. Still, its inflation pressures are mostly imported due to oil prices surging; that impact is being mitigated to some extent by a rising euro. Germany's Core HICP is up by 0.9% Yr/Yr and at a 0.7% annual rate over three-months. That's not much juice and no acceleration. Headline inflation is at 2.2% above of the ECB's ZONE-WIDE cap and above the old Bundesbank cap as well. With annualized three-month inflation at a German-apoplectic pace of 3.3% there is some reason for wariness; but we know why that pace is high: commodity and oil prices. As in the US these inputs are small fractions of final product prices in Germany. Despite the recent series of economic gains Germany would seem to have slack especially in its services sector.

The ECB; the German takeover?- The ECB seems to be poised to hike rates, a move that could be justified if the ECB were the Bundesbank, but a move that is not so easily justified since the ECB is not the Bundesbank. Maybe that 'B' in ECB stands for something else, which I am not aware of? In any event the Euro-Area is nowhere near as heated as is the German economy but the ECB seems to have made up its mind to make its monetary policy for Germany. It's true that the EMU inflation numbers are similar to those for Germany with headline HICP at 2.4% core at 1.2%, but in all other respects the Zone is so much weaker and the HICP is less pressured if we take Germany out of it. I still say that the pending ECB decision is an odd move and one that reflects only the unwillingness of Europe to come terms with how to deal with its heterogeneous territories and its 'Odd-Couple' arrangement to fuse exchange rates and little else.

Europe's paradox is at least a 'quadradox'- Europe is rife with destabilizing paradoxes. It is not just that the ECB is making policy for Germany. It is that Germany is underwriting pre-bailout funds to keep nations from declaring bankruptcy to protect the German banks that hold claims on these borrowers. This is putting the austerity burden all on the backs of the EMU borrower nations keeping it away from German bank balance sheets. One reason Germany can grow so fast is that its banks have not had to pay the piper for their lending transgressions. These policies while quite skewed to help Germany have come about because of Germany's innate financial strength and because Europe will not face the dilemma it has created. Despite German intransigence on the national debt rescheduling issue the Merkel government has bent over enough to help the rest of Europe to avoid European bankruptcies; but that has heaped up debt burdens on Euro-borrowers and lead to austerity plans that have crippled growth outside Germany. Moreover, the German effort, as strict as it has been to impose austerity on borrowers using fresh German loans, has nonetheless eroded Merkel's position at home. Without support at home she and Germany are powerless do more than what it has for European debtors; and so far Germany still has not done enough. This is the reality that continues to overhang Europe and that could burst to the forefront if the ECB makes policy for Germany and shuns the needs of the rest of the union, plunging it into a deeper abyss by hiking rates increasing its already lofty borrowing costs and boosting the euro undercutting competiveness across the Zone. Germany can take these repercussions, can the rest of Europe?

Or...Touche Trichet -- With Portugal already floundering to raise monies and having subjected itself to rigorous austerity measures, Greece lagging, Italy struggling and Ireland limping it is hard to see how the 'Community's' economic circumstances justify this move by the ECB. Hard money is a good thing; a too-hard-headed policymaker is not. We can look back to the interwar period and see how the UK's single-minded effort to restore sterling to its pre-war parity was a step too far for a country too ravaged by war and still struggling to rebuild output. The Euro-Area is in the much the same position today in a world where interest rate policy will rebalance currencies and where nations tied to the European monetary unit are still struggling with post financial-disaster rebuilding. It is not a rebuilding from warfare but there are many of the same issues and animosities in the air. The German's relentless push to combat inflation first is a bit like the hard-headed post war Europeans (mostly the Brits) who only knew the gold standard as a means to financial discipline. Spare the rod, spoil the child. But beat the child too mercilessly and you create a monster. Is that what Europe is doing? We are left to ponder if this is a German takeover of the ECB or it f it is just Trichet trying to make sure that he preserves his legacy and does not let the toothpaste out of the tube in his final days. In the end he could be deemed a good conservator of toothpaste but delinquent in the management of dental hygiene overall. Squeeze out a little toothpaste and use it. Inflation does not seem to be quite the risk that ECB is making it out to be. Sure, hiking rates will kill it, but what else will it kill?

German Orders and Sales By Sector and Origin
Real and SA % M/M % SAAR
  Feb-11 Jan-11 Dec-10 3Mo 6Mo 12Mo YrAgo QTR-2
Total Orders 2.4% 3.1% -3.6% 7.2% 19.3% 20.4% 23.5% 18.4%
Foreign 2.3% 1.7% -3.9% 0.0% 20.9% 24.1% 28.0% 14.7%
Domestic 2.6% 4.7% -3.2% 17.0% 17.2% 16.0% 18.9% 22.9%
Real Sector Sales
MFG/Mining 1.0% -0.1% -0.1% 3.4% 10.8% 13.5% 8.0% 3.1%
 Consumer 1.6% -2.0% -0.1% -2.1% 1.1% 4.0% -1.6% -4.0%
 Cons Durables -0.8% 3.7% -2.6% 0.8% 2.3% 5.8% 5.5% 7.1%
 Cons Non-Durable 2.1% -3.1% 0.3% -2.9% 0.6% 3.6% -2.6% -6.3%
Capital Gds -0.4% -1.9% 1.6% -2.5% 14.6% 16.0% 9.9% -3.9%
Intermediate Gds 2.3% 2.8% -1.6% 14.5% 12.3% 16.2% 12.1% 16.7%
All MFG-Sales 1.0% -0.1% -0.1% 3.4% 10.8% 13.5% 8.1% 3.1%
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