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Economy in Brief

German Orders Mark a Severe Backtrack in August
by Robert Brusca  October 6, 2021

German orders are sharply lower in the wake of severe problems in the computer chip sector and its impact on the auto sector. So why is Germany feeling the impact of the chip shortage so much worse than other countries, all of a sudden? In Germany, real exports plus real imports as a ratio of GDP are over 92%. Germany is heavily dependent on selling abroad as well as buying from abroad. Clearly, a shortage of a key part like a chip would affect it greatly, especially since the auto sector is very important in Germany. The auto sector in Germany is estimated at about 5% of GDP; that compares to 3% to 3.5% in the United States. And auto sector woes have just begun to worsen as the flow of chips is small. Whatever inventories were there to cushion the blow, they have been mostly used up.

Beyond autos, there is simply the problem of being so trade dependent at a time that the global supply chain is turned upside down. Depending on international trade for inputs simply means that there are many more opportunities for conditions to arise to create delays, bottlenecks, or to deny supply altogether.

We can see this in the German data as domestic orders are up by 14.8% over 12 months compared to 9.1% for foreign orders. Over six months domestic orders are up at a 9.6% pace compared to a 1.8% pace for foreign orders. Over three months domestic orders are up at a 7.8% pace compared to a 3.6% pace for foreign orders.

The domestic economy is doing better consistently than the foreign-dependent sector.

Part of this is the German dependence on trade within the EMU and the EU; Germany sends nearly 69% of its exports and receives nearly 69% of its imports from countries in the EU.

At the bottom of the table on industrial orders, the EU Commission indexes for industrial confidence in Germany, France, Italy, and Spain are listed. These are the four largest economics in the EMU. The 12-month change shows that industrial confidence is lower on balance in France, Italy and Spain while German industrial confidence is up by 7.7 points on the confidence scale in the past year. Reaching farther back, Germany shows an increase of 36.7 points from its industrial confidence level in January 2020. Italy has a gain of 13.5 points on that timeline; France has a gain of 8.7 points and Spain has a gain of 6.6 points. Germany leads the pack and its own domestic-source orders data underline this in comparison with foreign orders, where the foreign sector is everything outside German not just the EMU and not just the remaining EMU three-large economy countries.

Still, orders are decelerating on the 12-month to six-month to three-month timeline with domestic orders showing a complete formal deceleration and foreign orders stopping a bit short of confirming that trend. Interestingly, the average level for the industrial confidence readings for Germany and the other big-three EMU members shows acceleration in gear from 12-months to six-months to three-months. Of course, Germany shows the sharpest acceleration of all despite its vulnerability to supply chain issues, perhaps because the domestic portion of the economy is doing well.

Real sales trends show clear decelerations for sales overall, for manufacturing, for intermediate goods and for capital goods. Consumer goods are an exception with durables and nondurables having very different experiences. Shipments of consumer durable goods are very weak over three months while nondurables are showing some expansion and some grit over three months. However, real sales by sector are lower almost across the board compared to their January 2020 levels of activity.

In our analysis, we are transitioning from talking about the virus and its impact to addressing related but also different issues of supply chain economics. Today Ikea reported a change to supply more goods out of Turkey to simplify its supply chain. Supply chain issues are complicated and idiosyncratic. Each firm has set-up its chain in a way that at one time made sense for it. Now with parts shortages and transportation bottlenecks, wholly new arrangements might make more sense. Firms are going to be changing their supply chains ‘on the fly.’ There are all sorts of shortages and all sorts of supply problems that range from issues at ports, to warehouses, to the transportation network itself. No one seems to have realized how much the economic system before Covid struck was simply a well-organized interrelated machine that was operating near capacity. Once the virus hit and began to wreck how the transportation network fit together, the further problem was the inability to scale up that system to make up for output and distribution that was lost during the crisis. Supply issues mean in part that prices will do the rationing since that means goods will remain in short supply. When that happens, price rations the scare goods. Supply chain issues are at the heart of why inflation has risen and why the forces of inflation are bound to linger.

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