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Economy in Brief

German Retail Sales In Surprising Drop...And Their Relationship to The Euro-Debt Circus
by Robert Brusca  June 30, 2011

German retailing weakens - German retail sales (real sales ex-autos) fell by 3% in May (yes, M/M) a surprisingly sharp drop, taking the Yr/Yr growth rate to -2.9%. Meanwhile, auto registrations did move sharply higher in May as oil prices rose on world markets.

Retail sales drop as import prices rise - In the chart above we plot German real retail sales ex autos VS German import prices. Import prices are plotted as an index; here we plot the level. The long rise in the German import price index from its low in 2009 reflects the end of the financial crisis and rebound in prices in general in Germany after a period in which there were some months of sporadic price drops. The more recent rise in import prices comes to reflect the sharp rise on world markets of the price of oil and knock-on effects for petroleum products.

Oil price are one factor - As the German import price index has peaked under the influence of rising oil prices, German retail sales growth has soured. While May has produced a large drop, March, April and May together show sharply diminished performance for ex-auto inflation-adjusted retail sales.

German resilience is a let-down- This is all the more significant because Germany is the one country in EMU where consumer confidence has been at strong levels. To whatever extent EMU consumer confidence seems even as good as 'moderate,' it is because the strong German figures mix-in with the much weaker readings from other countries. As a result it is very significant when the country (the largest by GDP!) in the Euro-Area with the best consumer confidence sees retail sales fall off sharply as oil prices are sinking. If Germany is hurt that badly by rising oil prices, what of the rest of the Zone? Germany is one place where some consumer resilience might have been expected. To the extent that it was expected, it has let us down.

Germany and the UK both slipping - Instead, we find Germany reacting adversely to high oil costs. It's true that car registrations were strong in May and that is –potentially – a significant counterweight to the main retail sales series and its weakness. But in May we have seen retail sales drop also in the UK and UK consumer confidence - already troubled - has dropped further. Germany is not helping to hold demand up as high oil prices and other factors batter away at the consumer's budget and confidence.

Neither a borrower not lender be? -- While all eyes are turned to Greece it is true that the macroeconomic data for the Zone has turned soft, much as it has in the US. It may be that some of the Germans' behavior is directed at concern over their country's role in keeping Greece afloat. The bailout package backed in large measure by Germany is not popular in this high savings country where German savings are propping up the high-debt, low savings, tax avoiding Greek economy where protestors are assailing its own Congress for agreeing to further austerity as a conditions for further loans. No one it seems is happy. No wonder the expression is 'neither a borrower nor lender be...'

Kicking the can Vs getting our can kicked - The Greek crisis is not limited to Greece even if the financial effects are successfully bottled up - and it is still not certain that they have been bottled up successfully. We only know that for now we have avoided the worst. Greek debt is well over 100% of GDP and the burden on that small country is immense. One would be foolish not to wonder what happens when the road ends and we can't kick the can any more. Kicking the can down the road has been the metaphor for dealing with the Greek crisis. But what we should really wonder about is, down the road, who will get their can kicked by the Greek debt rollover?

Anatomy of unease: Fiscal conservatives lend to spendthrifts - This can-kicking tact has all the financial markets traits of denial. Greece's financials have been laid bare and we see the trouble that Greece is in. It would be hard enough to get a tax compliant country to bear down and shoulder the debt burden that Greece has but instead what we have is a problem in a country where tax avoidance is ingrained in the culture. It is not surprising that the fiscally conservative Germans are unnerved about bankrolling Greece. It is no help that part of the reason Greece got here was that it cheated on reporting its accounts.

Banks and their supervisors looking out for banks - On the other end if we look at the alternative it is pretty bad if not worse. One reason for rolling Greek loans forward is to avoid a crisis when the global economy least can afford it. This seems to be Axel Weber's view. But that does not solve the problem and may sow the seeds of other problems if moral hazard is triggered. Moreover, it is the European banking sector that is greatly exposed to Greece; in effect the rollovers by banks protect the banks themselves. It is hard to look at the Greek debt deal and see what Greece got out of it, while the banks will get a great deal out of it if Greece can avoid a default ruling.

An odd pondering - I have often wondered why countries in financial peril with high debt like Greece pay such high bond yields if indebted countries like Greece are not going be allowed to default. If the default risk is zero (as it seems to be when central banks do bank solvency scenarios and stress tests) then Greece should pay German interest rates. If the rates to be paid by Greece are high, then defaults should be allowed as part of the process since banks are getting their interest income premia as a compensation for bearing that risk.

The real culprit is the Kabuki of Euro-finance - There is more than one aspect of the Greek debt crisis that does not go down well. While everyone wants to blame the shutdown in German retail spending on rising oil prices I'd suggest looking a bit deeper into what can only be described as the Kabuki of European Finance.

The Euro-debt circus gets a new ringmaster - I'm sure that Italy is proud to have placed one of its own as the next head of the ECB, but Mr Draghi, do you really want to be the one to have to scrape this mess off your fine Italian loafers? What if Italy itself is drawn into the maelstrom? It is not a problem of your making but you are about to be thrust into the middle ring of this Euro-debt circus. Is that what you want? And now at the IMF you will have Christine Lagarde, a new Director, who has had to make promises to the developing nations to not play favorites. It think the Euro debt mess is getting messier and that the German consumer can sense the thickening of the plot, the same way that the US consumer is being increasingly put off by debt talks in Washington. These are two seemingly unrelated events but they are unfolding at the same time and I suspect their impact on events is being down played. We may also suggest that two events are not as unrelated as they seem as these two events (and others) are still parts of the financial crisis fallout that has yet to be mopped up.

German Real and Nominal Retail Sales
Nominal May
3Mo 6Mo 12Mo Yr
Retaill Ex auto -3.0% 0.3% -1.2% -14.4% -3.2% -2.9% 2.9% -8.4%
Car Registrations (Units) 8.8% -4.1% -4.9% -3.0% 12.1% 16.8% -34.2% 0.0%
Real May
3Mo 6Mo 12Mo 2.9% SAAR
Retail Ex Auto -2.8% 0.0% -1.6% -16.4% -5.1% -4.5% 2.0% -11.8%
Other Early Reporters
UK Nominal -1.4% 1.6% 0.0% 0.7% 3.0% 3.8% 3.7% 3.9%
UK Real -1.4% 1.1% 0.0% -1.1% -1.7% 0.2% 1.3% 0.4%
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