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Economy in Brief

German IP Heads South...With Europe in Close Pursuit
by Robert Brusca  November 7, 2011

German IP turned sharply lower in September falling by 2.7% month-to-month as its 12-month growth rate held at 5.4%. In the just-completed third quarter German IP still put on a good show as it rose at a 7.1% rate mostly on the back of a 3.2% jolt in July that boosted the level of IP right out of the gate. So enjoy it and wave good bye to the good times though the backseat windscreen. The drop in IP is the third drop in the past four months. Previous to this ‘streak’ German IP last fell in December 2010.

While IP has done well in Q3, Its performance in Q4 will be another story. We have a string of weak reports with IP boosted by one strong month in Q3. But the current level of IP at the end of the quarter is so weak that were IP to stay there for all of Q4 it would be shrinking at a 7.6% annual rate. After a big decline IP often does rebound so maybe IP will not stay that weak in the quarte... on the other hand (as the ambidextrous economist said…) IP has fallen in three of the last four months so maybe it will get even weaker.

Forecasting is forecasting so let’s not mix up some hypotheticals with the truth, but the truth is that IP starts Q4 in a deep hole relative to its average level in Q3 and the prospects for strength in IP in Q4 are not good.

As for the Euro-Area... the prospects continue to get worse. Retail sales fell in EMU fell in September and were weaker than had been expected. Real zone-wide retail sales were flat in Q3 and also are below their Q3 average as of September, making Q4 growth an uphill climb. France is introducing new austerity moves, something that is necessary if it is going to keep its AAA rating and ‘keep down’ with Germany (not keep up…). With such shenanigans in train and with Greece up in the air and forming a new government and the Germans giving Greece a clear ultimatum to either reform or get out of EMU the nice, tidy, world of Euroland is suddenly coming apart at the seams.

Let there be no doubt that ‘Euroland’ is not a segment of the theme park in Euro-Disney. But, if all this keeps up Euroland could replace ‘Adventure Land’ or ‘Frontier Land.’ Just picture the debt-flume ride as you rocket down a steep hill with your passing eased by a flume filled with mounds upon mounds of worthless sovereign debt certificates.

Meanwhile, Italy is getting battered, suffering with the highest bond yield spreads relative to Germany since EMU was formed. Berlusconi is reported to be talking to family members (family?) to decide if he should stay or go. Several key allies have called for him to step down pronto or was that Bunga-bunga?

Danish firm are having a hard time getting credit and are asking banks to loosen up. All across Europe the theme is the same: growth is weak and financial conditions are in tatters.

Meanwhile back in the old US of A…the authorities there had introduced TARP a nonetheless much maligned program that force-fed banks capital as it rode them to raise capital when the financial crisis cooled. Europe did not do anything of the sort. Authorities also prevented what they determined as weak firms from paying a dividend. But Europe did not do that either. The pretense was that European banks were in better shape. Question: better than what?

Whereas the US tried to run honest ‘stress-tests’ on banks Europe sprinkled fairy dust on them and ran puff ball tests. All Irish banks passed the first stress test and Dexia, the very troubled Franco-Belgian lender, passed both of them. It was like giving kids high school diplomas for sticking it out even if they still could not read.

So now Europe is in a mess of its own making an neglect. The stress seems to be getting worse. A new UK indicator points to the prospect of a coming recession in the UK. German IP is very weak. France is cutting its spending and that will weaken its economy, further. Italy is being pressed to cut more. Greece has the mother of all austerity programs in place. Where will European growth come from in such a place? Now that is a good question. The answer is nowhere. Europe is rushing headlong into recession and, on the way, nations seem to be doing everything they can to make it worse.

We could call this the age of anti-economics. What would Keynes say? He would probably just ask for an air-sickness bag and be done with it.

Total German IP
SAAR Except M/M Sep-11 Aug-11 Jul-11 3Mo 6Mo 12Mo Q-2-D
IP total -2.7% -0.4% 3.2% 0.0% 0.0% 5.4% 7.1%
Consumer 1.1% -4.4% 2.3% -4.5% -3.6% 0.5% -4.6%
Capital -4.7% 1.1% 5.2% 5.7% 3.2% 9.1% 15.3%
Intermed -2.8% -0.4% 2.3% -3.7% 3.2% 6.6% 7.3%
Memo
Construction -0.8% -1.7% 4.0% 5.5% -11.0% 4.4% -0.3%
MFG IP -3.0% -0.4% 3.6% 0.4% 1.8% 6.4% 8.6%
Real MFG Orders -4.3% -1.4% 0.0 -27.9% -5.1% 2.3% -13.5%
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