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Economy in Brief

Four Drops in a Row for German IP; Six Monthly Declines in the Past Seven Months
by Robert Brusca  February 7, 2019

Four blood-lettings and a funeral?
Germany's industrial production has fallen in each of the last four months. Can a recession be far behind? German indicators are screaming in unison about the onset of economic weakness. The industrial production report is the last ‘big' report on the month and it has now put the expected nail in the coffin of optimism. But has it also driven a stake through its heart?

As vital signs seem less vital
As always, we are just not quite certain how unoptimistic or (perish the thought) pessimistic we should become. But if the trend is your friend, it is saying the good times will end. IP is down sequentially for 12-months, six-months and three-months. The headline and the sector for consumer goods show declines and become progressively more intense over shorter, more recent, periods. These, not just negative but progressively deteriorating trends, are the really bad news in the pipeline. For intermediate goods, output declines soften but only by rounding error in the growth rates; the period-by-period rates of decline all are weaker than -4%. Capital goods trends are unclear, but there is a lot of weakness in the series even if it is not progressive deterioration. It is marked by persistent output declines

Broad weakness
The weakness in Germany is present in all major industrial gauges and weakness has spilled out into the services sector as well. Growth rates for industrial gauges are declining and now industrial output is contracting and contracting sharply. But in December manufacturing output rose. And the Markit manufacturing gauge is at 51.5 in December- not signaling contraction but signaling weakness. Still, the manufacturing IP index has fallen in five of the last seven months and it shows declines over three months, six months and 12 months. These declines are becoming progressively steep despite the gain in output in December (following a sharp drop in November). Clearly, PMI nomenclature, stating that a reading above 50 does not signal sector decline, is not going to carry the day.

Some prevarication
So there are some data that point to prevarication in the downtrend trend. Real sector sales also rose in December and they even rise over three months (but fall over six months and 12 months). The presence of some islands of growth in this sea of reporting weakness does not reverse the result or slow the trend.

Weak in Germany and out there...
And since exports are at a ratio of 50% to German, GDP we know that Germany is reflecting the global conditions of its trade partners. Internationally forecasts are being cut. Today, the BOE reduced its outlook for U.K. growth as it tries to face up to that country's future under a still unknown and increasingly risky-looking Brexit deal.

Central bankers shift gears
The Reserve Bank of Australia has kept its rate targets but cut its outlook. Last night, the Bank of India cut rates unexpectedly and shifted its stance to neutral from ‘calibrated tightening.' In the U.S., the Fed has cut back its rate hike profile and said that it could now be patient with policy. Mario Draghi has already said that the ECB could turn its stimulus program back on, if needed. Clearly, there has been a good deal of backtracking among central banks that, before yearend, were on a track to raise rates and or to reduce other programs of stimulus.

What keeps central bankers up at night
But the real fear was expressed by the UN with its pronouncement that another round of tariff hikes in the U.S.-China dispute could have massive consequences. Not only would a tariff hike be a shock to the system, but the system itself is much more fragile that it has been in a while. This ‘system' has not been able to produce targeted inflation of 2% in the U.S., EMU area, or Japan since at least the Great Recession. There are many disciplining forces at work in the global economy. Central bankers are reacting to a newly perceived reality as much as to a new reality. Even very low and dropping unemployment rates in places as diverse as the U.S., U.K., Japan, EMU and Germany have not been able to kindle lasting 2% inflation. Keynesian-fear-of-bottle-neck economics has been a bust. The store never runs out of milk no matter low lean the inventory or how few stock-boys as long as there is delivery by the internet. In the U.S., the Fed began hiking rates at end-2015 and has needed a number of novel statements about inflation risk eventually simply deciding to erroneously say that it was confident that it would hit its inflation target in the medium term. This justified a series of rate hikes that actually undermined inflation's ability to reach 2%. When academics look back at this period, there is going to be a lot of head-scratching about what the Fed was really doing.

But just as clearly as we are not in the financial crisis anymore, we are not in the recovery period from it anymore and we are not in a period of sustained growth with building inflation pressures either as central bankers seemed to have thought… Exactly where we are is yet to be determined. Policy is no longer out in front. There is no guidance from anywhere. Central bankers are watching and waiting and not all sure about what will happen next. There are just too many possibilities to handicap them all. But the data from Germany, an exceptionally strong economy, do not provide a shred of reassurance. German data have been nothing but disappointing for a number of months now. It may be that our future falls in the lap of the Trump-Xi summit over trade. That is not a surprising statement, but there, now I have said it out loud. And it is hard to know what will happen. China has been very good a spinning the rhetoric and making promises – and it has always been good at that. But Trump has been clear that he will not settle for words. He wants nuts and bolts, dollars and billions of dollars of promises and timelines for the delivery of these new conditions. He also wants reassurance on some things like the theft of secrets, subsidies and forcible technology transfer that may not be easy to express, promise or guarantee even for the China's leadership give the regional nature of some SOEs (State Owned Enterprises). Unfortunately, the facts on the ground still leave the future up in the air.

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