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Economy in Brief

German Foreign Orders Plunge...Again
by Robert Brusca  January 6, 2012

German orders are losing momentum again and rapidly after a false signal of a pause in the unraveling as of October. Orders in October had surged by 5% (M-o-M) and a surge of that degree blunted a lot of downward momentum that had seemed to be in train as October posted a very powerful one-month gain. Yet, now, in the light of the 4.8% drop in November and the September drop of 4.6%, we are left instead with a legacy of extreme volatility and of clearly waning momentum in what was one the Zone’s stalwart economy Now it has warts and it is stalling.

Foreign orders are now much weaker year-over-year as they are off by 7.7% compared to domestic German orders which are nearly unchanged (-0.1%) on the year. German domestic demand is still more or less stable on this report but overseas markets are crumbling.

While German domestic orders are nonetheless weakening, near term they are down at a 4.9% pace over six-months and at a 10.8% pace over three-months, foreign orders to German firms are dropping at rates of 22% to 23% over both three- and six-month horizons expressed at annual rates of change. There is nowhere to hide.

Real sales by sector show that consumer goods sales are being maintained best, while the usual bulwark for German industry, capital goods sales, are off at a 17.2% annual rate over three-months. Intermediate goods sales are off and for all of MFG sales are off at nearly a 12% rate over three-months.

In the fourth quarter with two thirds of the data in-hand, German real MFG sales are falling at an 8.3% annual rate. Because of the odd gain in October, orders for the quarter are down at only a 0.3% pace in foreign markets and at a larger 10.9% pace domestically. Overall orders are falling at a 5.2% pace in Q4.

Weakness is clearly setting in across the Zone. While US data are continuing to look better, no one wants to bet too much on revival instead preferring to view the US as perhaps subject to the Wile E. Coyote effect. This cartoon character of Roadrunner cartoon fame would chase the Roadrunner who would stop on a dime while Wile E. skidded over the edge of a very tall mesa. Wile E. would be suspended in space until he looked down only then did the law of gravity kick in. Nearly everyone is looking at the US economy as in the midst of some sort of revival either real or short-lived but one that regardless of its domestic attributes will run afoul of some severe negative shocks from Europe. At some point it is assumed the US economy will ‘look down’ and find it does not have enough support and collapse as well. The German report today is roughly consistent with such a view. The US may be able to withstand a modest European downturn but a severe one puts new risks on the table. And no one is really quite sure how strong the US incipient acceleration truly will turn out to be.

Against that uncertainty about the US we have a pretty certain unwinding in Europe. Europe’s best chance to keep the wind-down modest is Germany. And Germany seems to be getting pulled into the vortex based on data from November. Its PMI data have been a little more upbeat recently. The die is not yet cast. But German retail sales have been weak and no one should picture Germany like an icebreakers surging through hard times in the Zone-Germany is simply too connected to economies that are weakening and its own domestic demand is not up to being the replacement for it. But if the Germans were import replacement consumers as was done one year when the NFL players in the US went on strike and the season went on with replacement players...never mind.

Beyond that the Euro-Area’s still-fractious nature makes Europe a highly risky and contagious place in 2012. Countries whose economies already are in recession as the rest of the zone is slipping are still being pressure to meet austerity budget targets. They are in effect shooting at targets that are moving away from them. Hitting these targets will mean making their recessions worse. Does that make any sense? With Europe’s strongest economies being pulled into recession there will be less ammunition and less willingness to launch assistance programs so a true break-up of the Zone is really on the front burner not the back one.

Athanasios Orphanides, the head of the central bank in Cyprus, already is trying to reverse the Greek bailout. This is an interesting development which will probably bear no fruit but it raises an interesting question about the Euro dynamic. Helping Greece has some pluses and minuses. But once it was decided that private lending to Greece might not be fully protected and private losses were to be put on investors the euro-crisis spread more rapidly to the rest of the Zone. If Greek debt was not sacrosanct would Spain’s be? What about Portugal’s? What about Italy’s? Even the French and German bond markets have been under some degree of stress. So a view which began with the idea of stopping Greek default that could spread throughout the Euro-Area like some out of control domino effect instead created a non (technical) default that spread different fears throughout the Eurozone.

To me this is a very good lesson for investors on how markets take their toll. You just can’t put the toothpaste back in the tube nor can you pretend that you can. So Europe remains in the middle of this mess exacerbated by having hitched its economic model to the notion of austerity.

Government intervention does not always work magic. Sometimes its intervention makes things worse or keeps them just as bad but in a different way.

Unless a lot of things change in Europe and there is a much munching of humble pie on a number of fronts that is needed, there is little chance that EMU can emerge whole from the stresses in 2012. Europe needs much more than financing. It is not about a bazooka. If a tank attacks, get a bazooka. But Europe is under assault on many fronts; it’s an infantry attack and the bazooka is no good. Bazooka is a rotten metaphor. Europe needs to connect with its grass roots, its people and to decide what it wants to be instead of trying to patch together what is there and preserve something than many people want to change. Can Europe bridge is differences, set a model for what EMU should be, inscribe it in some new rules, accept them, then turn to the financial needs to extricate itself from where it is to get to where it needs to be in 2012? NAHH! It seems highly unlikely to me. There is way too much work to do on too many levels with divisions that run too deep. To me this is the one near certainty for 2012. Would Europe choose to not do all this and to take some partial steps and try to kick the can down the road again? It might. But that will leave it at risk with a partial fix (of some sort) that will leave Europe still crippled. So that approach is no solution and kicking the can down road may just lead problems to accumulate, to get bigger, and to become less solvable.

What remains uncertain is whether the coming euro collapse will be a disaster for Europe or for the world beyond... and that is still the more interesting question. We will be spending the entire year trying to sort it out.

German Orders and Sales By Sector and Origin
Real and SA % M/M % SAAR
  Nov-11 Oct-11 Sep-11 3Mo 6Mo 12Mo YrAgo Q-2-D
Total Orders -4.8% 5.0% -4.6% -17.0% -15.5% -4.3% 20.3% -5.2%
Foreign -7.8% 8.1% -5.8% -22.0% -23.2% -7.7% 25.4% -0.3%
Domestic -1.1% 1.3% -3.0% -10.8% -4.9% -0.1% 14.4% -10.9%
Real Sector Sales
MFG/Mining -1.1% 0.7% -2.9% -12.3% 0.7% 2.0% 12.4% -8.5%
Consumer 0.1% 0.6% -0.1% 2.5% -4.0% 1.8% 1.4% 0.7%
Cons Durables -0.9% 2.4% -0.8% 2.5% 4.4% 1.8% 6.3% -8.6%
Cons Non-Durable 0.3% 0.1% 0.2% 2.5% -5.3% 1.8% 0.5% 1.9%
Captial Gds -1.8% 1.6% -4.4% -17.2% 7.4% 2.8% 17.6% -8.3%
Intermediate Gds -0.4% -0.6% -1.9% -11.3% -5.0% 1.4% 12.6% -12.6%
All MFG-Sales -1.1% 0.7% -2.8% -11.9% 0.7% 1.9% 12.6% -8.3%
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