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Economy in Brief

German Confidence Goes Kaput As the Virus Fires Up and Evades Vaccine Shields
by Robert Brusca  August 26, 2021

German confidence, after mounting a steady rebound since June, has made its first serious backtracking in September. The GfK consumer climate measure did erode in August falling to -0.4 from a value of -0.3 in July, but that was a technical erosion and the most ‘bare-bones' reversal possible. The drop in September takes the climate indicator lower to its 11th percentile in ranking terms. A bottom 11% reading on consumer climate is bad news.

The evolution of the climate reading
Since May 2020, Germany has logged an uninterrupted string of negative climate readings on the GfK index, which is a forward-looking consumer climate assessment. Despite all those readings being negative, that still has not been a period of uniform assessments as the rollercoaster of readings fluctuated between a low reading of -23.1 and a high reading of -0.2 on that timeline. German climate was clobbered as the virus hit in 2020 driving the GfK measure to its -23.1-cycle low in May 2020. The index dropped from +2.3 the month before and +8.1 the month before that as the virus took root and disrupted economic activity. But Germany recovered quickly, taking the climate reading up to -0.2 by August 2020. But then there was a nearly uninterrupted string of bad news. As climate eroded and registered double-digit negative readings in February and March of 2021. Then from May onward, the climate readings went on another recovery path until this September reading which may prove to be a kerfuffle of trend or may start another episode of deterioration.

Uncertainties stalk the German economy
Germany is seeing its political leadership under pressure as the CDU is losing favor and the Social Democrats are gaining purchase at least in current polling- as Angela Merkel exits the German political scene. There is also the policy blow-up nearby in Afghanistan that risks sending another wave of immigrants to Germany and across the EU as happened when Syria broke down under the persistent pressure of warfare. Germany (as well as France and the U.K.) is urging the U.S. to stay longer in Afghanistan to complete an orderly pull out, but the U.S. is taking the timeline offered by the Taliban as absolute. Germany is also facing higher inflation that it is accustomed to; German inflation has even accelerated to a 3% pace; the ECB inflation averaging strategy may keep inflation elevated for a while longer on the brink of the German discomfort zone which is anything at or above 2%. Then there is the virus which has spread like wildfires. And Germany has had its share of natural disasters as floods have swept through creating property damage and bringing death. These have been linked to global climate change. The sputtering global recovery is only one aspect of the problem of consumer confidence. The IFO report issued yesterday showed weakness and spoke of ongoing supply chain problems. Grafted on top of that are the new worries about the fast-spreading virus and its changing characteristics and its greater transmissibility. It would be surprising if this adverse consumer climate reading for September were the end of the German deterioration.

The September report
The GfK headline reading is for September as this is a look-ahead survey. The survey components lag by a month. Those readings are not as weak as the headline, judging from their queue or count standings.

The economic reading did take a large step back in August, dropping to 40.8 from July's 54.6. That monthly drop, the magnitude of the drop ranks in the 11th percentile; among the largest drops the series has seen in its lifetime. However, GfK's survey still leaves the economic expectations series in its 86th queue percentile, a relatively high-water mark.

Income expectations did not erode; in fact, ticked higher in August. But this reading still has attained only a 52.5 percentile standing, a very neutral reading that is just above the series median result (which occurs at a standing of 50).

The propensity to buy gauge was lower in August by 4.5 points, falling to its 32.6 percentile to reside in the bottom one third of its historic queue of values. This is a weak reading and one that is the sixth lowest reading for this metric since March 2020 (a total of 18 observations- so it is in the bottom third of this shorter comparison as well).

Germany, while usually a solid economy, has been struggling since the virus hit. Its manufacturing industries have recovered well, but the service portion of the economy has been slow in restarting. The impact on confidence has been harder on Germany than in other Western European nations despite the fact that these phenomena are widespread.

European confidence select EMU members
Confidence measures in Italy and France lag Germany in their topicality by two months. These lags are more important when there are new developments as we have now with a new step down in confidence in Germany and a new wave of intensified infections from the virus. As of July, confidence in both Italy and in France had not been stabilized. In France, confidence stepped down after just having risen the month before. In Italy, confidence was making a strong run higher as July was the fourth monthly increase in a row, a move that has taken the Italian index higher by more than 15 points. French confidence was also on a string of increases, but on a much milder gradient. Its gain since February has taken the confidence index higher by eight points despite the July setback. Confidence in Italy has a surprisingly high 97.9-percentile standing while in France it stands at 80.4-percentile mark. Both are leagues higher than the confidence readings are or have been recently in Germany.

The U.K.
The U.K. data lag by one month; the survey is up-to-date through August. The U.K. reading did tick lower in August. But that index has been on a string of improvements and strong improvements since January 2020. There were six increases in the index in the last seven months with August's one-tick back step the only interruption.

The virus
The virus has been and on-again/off again problem globally for some time. And no country has been able to escape the spread of the virus without employing growth-destroying lockdowns. New Zealand had seemed to have found a way around it, but now it too is embroiled in a covid lockdown. In a global economy such as ours with so much international travel, trade, and linkages, it is hard even for a small island economy to buffer itself.

What lies ahead...
The future is now even more unknown. Vaccines were not the silver bullet to kill the vampire. They were able to wound it and make it stagger. And the next step now appears to be booster shots (reloading the gun)...or maybe a better vaccine (Novavax?)? But booster shots are not now supported by WHO since they would divert vaccine away from poorly vaccinated low-income countries and delay their getting a first dose while developed economics seek a second round of dosing - in some cases a third a shot. There are still mask-wearing (a controversial and largely infective response) and social distancing as tools to stop or slow the spread. There may be drugs that could be approved to add to the vaccine arsenal to fight the virus if organizations like the FDA would be more open-minded. As things stand, we are set for a program of never-ending boosters and still the fact is that the developing world's population that must get a first round will then have to get on the booster-shot not-so-merry-go-round as well. All in all, it's a daunting future. And if the ‘wrong sort' of variant emerges in the interim, things could get much worse. And yet, there is already so much in the world that is going wrong. Progress is measured as two steps forward and one step back. It is progress. But it is halting. And globally risks have grown.

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