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Economy in Brief

German Orders in December: No Good News Need Apply
by Robert Brusca  February 6, 2020

Germany's orders fell yet again in December and even faster than in November. The drop – the severe drop- was not expected. And this is only December. Germany has yet to post results for the period when the coronavirus took hold in China, a period in which the German supply chain will put under stress. There is little good news for December and little that will be on tap in January. How expectations can change!

German domestic orders grew by 1.4% in December; that is the second month in a row of their advance. However, foreign demand decreased by 4.5%. Orders from the euro area plunged 13.9%, a severe onset of weakness. However, demand from other countries grew by 2.1%. That later percentage will be put under the stress of the coronavirus in January and probably more so in February.

Domestic orders show persistent weakness but do show signs of progressive deterioration. However, foreign orders show exactly that: signs of clear progressive deterioration. Orders fall sharply by 8.7% over 12 months then fall even faster at an 11.4% pace over six months and that is stepped up over three months as real orders fall at a 15.7% annualized pace.

Broad long-date weakness
Total German real orders are falling on balance over 12 months for 17 months in a row. Foreign orders, on this basis, are falling for 16 months in a row. Domestic orders 12-month percentage changes fall or do not rise for 19 months in a row. The weakness in German real orders has been quite persistent and broad-based. Over 29 months (from August 2017), real German orders have fallen by 9.9%, foreign orders have fallen by 9.2% and domestic orders have fallen by 10.7%. This is significant weakness but not to be confused with the sort of 30% to 40% peak rates of declines that prevailed over 12-month periods in the last recession. Still, there is probably more to come. The weakness encroaches broadly on sources of German trade, but as yet it is nowhere near a virulent as the declines brought on in recessions.

Global growth
These calculations underscore the fact that the impact of the corona virus is – will be- hitting the global economy at a time that it is already weakened. The Baltic dry goods index continues its near straight-line plunge from its local peak back in September. That drop speaks to weak cargo usage for the period immediately ahead which in turn causes freight rates to drop.

China
China is extremely worried. Is has been injecting liquidity to stave off any finical ramifications. China has cut tariffs up to 50% on a cross section of U.S. goods. The ministry did not state the value of the goods affected by the decision, but the products benefiting from the new rule are part of the $75 billion of goods that China announced last year when it said it would impose 5% to 10% tariffs on September 1 of last year. China is looking to achieve some stimulus. It may have to invoke a disaster-related clause in the just signed Phase-One agreement if the virus keeps China from fulfilling pledges made in that agreement.

Beyond China
And China is not alone with its concerns. The Philippines central bank cut rates today citing the risks from the coronavirus. Separately, Brazil also cut rates today. In Europe, the Czech Republic went the other way, hiking rates by 25bp. Despite an agreement by an extended OPEC group to cut production by 600K bpd, oil prices were weakening on the day with both Brent and WTI prices falling. Stock markets have rallied and bond yield have stopped falling and even have risen slightly as financial markets experts try to handicap the risks. But they are shooting at a moving and partly hidden target.

German sales trends
Data on real sales by sector show that overall German sales are imploding as well. Germans sales fall by 4.5% over 12 months, falling at a 5.5% pace over six months and falling faster at a 6.1% pace over three months. Consumer durable goods trends fly in the face of this weakness on accelerating trends for sales culminating in a 20.1% annual rate of real sales growth over three months. But sales of nondurables still fall over all horizons. Capital goods sales also fall on all horizons and decelerate steadily. Intermediate goods sector sales fall on all horizons but without clear trends but still with significant declines. Monthly trends largely echo these results.

German economy and global operations of firms
The German economy is still experiencing a great deal of weakness. It once plugged itself and its auto sector into the Great Chinese growth machine and now it will be seeing the downside of that dependency. Many firms operating in China have announced plant shut downs as their supply chains are being interrupted by actions taken against the spread of the coronavirus. According to S&P (here), Volkswagen is the most-exposed to the coronavirus in China. Volkswagen sells almost 40% of its cars in China. Nissan also has substantial exposure. Korean automakers already have shut some local in-country factories because of shortages from parts usually sourced out of China. Four days ago Hyundai suspended production in South Korea because of parts shortages (Source). Auto manufacturers extending factory closures in China include Hyundai, Tesla, Ford, PSA Peugeot Citroen, Nissan and Honda Motor Company.

However, European carmakers have suffered disruptions only to their China factories as they employ 'build where you sell' supply chains. Volkswagen, Audi, BMW, Fiat Chrysler, General Motors Co, and Ford said their factories outside of China remain unaffected by supply bottlenecks (as of February 4).

Global supply chains (genuflect)
Just remember when the U.S. imposed its China tariffs how some howled 'supply chain'. The impact of the coronavirus will be worse because it is not based on U.S.-China trade but on China's trade with everyone. Although China is an enormous country, its developed and highly industrialized regions are concentrated. While automakers may have pursued a supply chain strategy that sequesters activity regionally, not all companies do that. DHL for example notes this:
"Companies and factories in several major cities and provinces – including Beijing, Zhejiang, Jiangsu, Guangdong and Shanghai – have been ordered to halt their operations until at least February 9 with the exception of medical equipment, pharmaceutical companies, supermarkets, utilities and logistics companies in a bid to quell the coronavirus outbreak." (Source)

The potential impact across a broad expanse of industries is clear. The Logistic management website says this and offers this warning:
"The overall cost of living and operational costs are also lower than China's eastern seaboard factories. These economics have drawn large corporations and whole industries to develop manufacturing sites in Wuhan. Airports, railways, trucking, and logistics services are also excellent. Parts of your supply chain may originate or pass through Wuhan for manufacturing, assembly or finishing. If so, you can expect wide-spread shortages or delays for materials sourced or manufactured there. The length of the lock-down in Wuhan is unknown and your global supply chain for raw materials, parts, or finished goods may be at risk." (Source)

The Statistics of the Virus
How dangerous and lethal is the virus? Well, my PhD is in economics not medicine so I can't answer this and medical professionals are notoriously careful about giving prognoses. However, it has been pointed out that mortality rates for infected people in Hubei are 3.1% compared to 0.16% for people outside China. What does this tell us? Well, we can see that in Hubei the risk of dying is 20 TIMES greater that for those infected outside China. This suggests to me one or two things judging from the statistics rather than from my medical knowledge. The virus should have one pooled mortality rate, so one of two things is happening (or a combination of these two). One: that the rate of infection in Hubei is vastly understated and may be 20 TIMES GREATER than what we are told it is. Because if it were, the rates of mortality inside Hubei and outside China would then be 'the same' and that makes sense. Two: A second possibility is that since so many fewer people outside China are affected that they are getting much better medical attention and the quality of medical attention makes a difference. We know that medical resources in Hubei ae swamped and many people are being turned away from care. That also would affect the mortality rate and make it higher in China. So as more resources are thrown at the problem in China, mortality rates should recede. But it looks like a very great amount of resources are needed and right now it looks as though things will get worse before they get better. Simply isolating people will help to stop the spread of the disease outside the region, but non-treatment will not suppress the too-high mortality rate in China.

Summing up
On balance, there is a lot up in the air. And the virus is not the only thing for us to have concerns about. Central banks come to this moment already with the levers pressed pretty much to full–stop on stimulus. The Fed in the U.S. executed its rate cuts last year and still has room to cut rates without resorting to extraordinary measures. So far, U.S. data have been obliging the Fed's even-keeling desires even showing some unexpected strength as in the ADP jobs report, the ISM readings, and consumer confidence have firmed. But the durable goods orders report was a reminder of the economic fragility. The global economy finds itself not 'in a good place' as this virus strikes despite 'good place' being a phrase the Fed has used persistently to describe the U.S. economy. To be sure, the U.S. is better-positioned to deal with this crisis than most, but generally this is a difficult hurdle that is being put up at an unfortunate time.

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