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Economy in Brief

IFO Backs Off as Bundesbank Blames Bottlenecks for German Eco-angst
by Robert Brusca  October 25, 2021

The German IFO gauge stepped back in October as the all-sector climate reading fell to 12.9 from 16.9 in September. The current business situation weakened marginally falling to 28.2 in October from 28.9 in September. Expectations fell to a reading of zero in October from 4.1 in September. The weakening was broad-based with climate improving in only one of five sectors, Current conditions improved in two of five sectors, with expectations improving in two of five sectors. The construction sector improved on all three measures while services improved in the current and in the expectations measures but not in the climate measure.

Climate, current conditions, and expectations

The rankings or standings on these three metrics also are moderate-to-weak with the climate reading and current reading each sitting at about the two-thirds mark in their respective historic queues of data. Expectations sit in their lower quartile with four of five sectors posting standings below their respective historic medians (below 50%), one near the bottom 25 percentile cut off and two below the 25-percentile cut off. In short, expectations are still very weak and are weak across the board.

Bundesbank blames lags and bottlenecks

In a statement today the Bundesbank blamed German economic weakness on delivery lag issues. In its monthly report (here) the Bundesbank concluded that bottleneck and raw materials deliveries damped industrial production, reducing the strength of the German recovery. However, the Bundesbank sees the German recovery continuing.

Germany’s vulnerability

Data from IHS Markit (see story Here) show the severity of delivery lags by regions for a group of 18 counties/regions. Germany ranks as the 11th worst in terms of delivery lags in that table. Only Asian countries, Turkey, Russia, Canada, and the world average are worse than Germany on delivery lags. Germany is marginally worse off than Japan and much worse off than North America. Germany of course is very plugged into the global economy as its exports and imports are at an extremely high ratio to GDP compared with most developed countries. The ratio of German exports plus imports to GDP in nominal terms is 88%. Germany is highly dependent on trade both sending exports and gathering imports, many of the imports are raw materials, to fuel its economy. When trade impediments emerge, they tend to hit Germany harder because of this international dependency.

The service sector is the weakest

The service sector continues to be the weakest among the five sectors detailed. Across all three metrics climate, current conditions, and expectations the services ranking averages a very weak 28%, that is followed by a 47-percentile average for retailing and a dead neutral 50 percentile average for wholesaling. Manufacturing averages a 56.8 percentile standing with construction at a much firmer 77.0 percentile. All-in-all these are not very robust readings.

It's been a weak recovery

Looking at performance since the virus struck and changes in these index readings since January of 2020 reveals a weak recovery. The changes in the average on all three measures since January of 2020 just before the virus struck shows retailing, services, and construction to be net lower on balance- that’s no recovery and further weakening. Wholesaling has an average rise from January of 2020 of 6.8 points while manufacturing posts and average of 19.3, a gain so large it propels the overall average change on the three metrics to a +6.3 Despite having three sectors net lower on this same net-change gauge.

The current index usually scores the highest standings

Looking at the individual metrics we find some of the highest percentile readings under current conditions where construction and wholesaling have standings in their 86th and 84th percentile, respectively. Manufacturing and retailing are ranked in their respective 70th percentile deciles but because of a weak 33 percentile standing for services the current standing only logs an all-sector rank that only falls in its 66.5 percentile.

Summing up-

On balance the German economy is struggling. The service sector is quite weak. Manufacturing logs solid to strong readings on a consistent basis despite the international supply chain problems. All central banks globally are convinced that these problems are being solved and will not pose a lasting problem for inflation. Yet corporate executives continue to see supply chain issues extending into 2022 and see pricing pressures remaining and getting worse next year. Both the ECB and the Federal Reserve are having trouble keeping the faithful convinced that this is not a real inflation problem that it is overwhelming them. So far markets have been willing to take the guidance from central banks and run with it. But in the US a well know economist and former US treasury secretary in a Democratic administration, Larry Summers, has expressed concern that the central bank in the US is downplaying authentic inflation risks. Time will tell on this one. In the meantime, choose your side in this debate but remain vigilant and nimble.

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