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Economy in Brief

Germany Shows Steady...Ongoing...Erosion
by Robert Brusca  July 25, 2012

The chart depicts the IFO standard indices while in the table we show the history of sectors using the IFO diffusion gauges. Both approaches show a sliding German economy. Retailing and construction have become the relative strongest sectors as each resides in the 90th percentile its respective historic queue.

Leading the way lower is the usually stalwart German manufacturing sector. It now resides in the bottom 37% of its historic queue followed by services in the 57th percentile of their queue.

The chart shows the brief moment when the German indices were moving higher even as Europe was starting to have some of its now infamous problems. From October 2011 through April 2012 after falling in step with other European gauges the German IFO staged a recovery that began to look to some as though Germany were de-coupling and would be able to rise above the problems in Europe. But after April 2012 it became clear that such a dream was in fact a fantasy. In a one-month drop from April to May of 2011 the German IFO lost nearly all the ground it had gained from Oct 2011 through April 2012. By June it was even lower and the index has since continued to fall. The climate index was last lower in July of 2010.

Germany seems to have been pulled fully into the orbit of the weakening EMU nations. Moody’s just this week issued a warning of the risk of a downgrade for Germany and other still-top rated EMU governments.

Is this where the rubber finally meets the road?

If it has not been clear to Greece and to Spain and to Italy and to Portugal, Germany will not be their sugar daddy forever. The burdens already have taken a toll on Germany (some of them are derivative through the ECB). They have eroded its economic strength and are cloying at its financial strength. If the rest of Europe does not ‘get it’ soon ‘it’ might be too late.

Germany cannot be the backstop for all of Europe’s issues. It may be that Germany as the paymaster has set a task that is too severe for its fellow members to achieve and one that is too demanding for Germany itself to be able to help them to success. Perhaps this is a better way to look at it than to say Germany is being too insensitive, and that the other nations are not being responsible.

Economies come with real-world constraints. Only in the world of mathematical models can you slide so easily from one sort of equilibrium to another. And once a country goes down a certain path, it can be hard to re-trace its steps. Time does not allow you to go back and do it a different way.

Spain cannot simply ‘unlend’ monies to the real estate developers and ‘unbuild’ existing surplus structures. Those structures are now there. Some are surplus. They may never be viable. Worse, some may require further cash to rip them down… Real estate can be a real money pit. After getting a huge bank ‘bailout’ Spain is now highlighting its regional debt problems. What is next?

Greece has years of bad and unsupportable behavior it took for granted and as its ‘new life-style; it must now unlearn and many of these behaviors. Greeks see what has been their unaffordable excessive way of life as a ‘right.’ So the change will not come easy.

The entire process is complicated because the sooner that a nation makes the necessary changes the sooner it will be off financial support. But sometimes fast change is too painful to be achievable. Germany does not want to finance slow change since it is expensive. It is but fast change may not be achievable. That is our conundrum

Summary of IFO Sector Diffusion Readings: CLIMATE Standings
Climate Current Last Mo Since June 1991* Queue or
  Jul-12 Jun-12 Avg Median Max Min Range %Range
All Sectors -0.6 3.1 -5.1 -5.9 22.2 -36.7 58.9 61.3% 62.3%
  MFG -1.9 4.8 2.8 5.6 30.0 -43.7 73.7 56.7% 37.2%
  Construction -6.7 -4.7 -28.3 -29.1 3.3 -49.1 52.4 80.9% 93.5%
  Wholesale 3.9 5.0 -9.6 -13.1 27.0 -39.0 66.0 65.0% 76.2%
  Retail 5.1 0.3 -15.1 -15.7 23.6 -41.4 65.0 71.5% 91.8%
  Services 15.7 21.3 10.7 10.0 33.0 -15.7 48.7 64.5% 57.8%
Current Conditions 11.6 16.0 -4.9 -7.9 33.8 -38.9 72.7 69.5% 79.4%
Exceptions -12.2 -8.9 -2.5 -1.1 17.6 -45.3 62.9 52.6% 18.7%
* June 2001 for Services  
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