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Economy in Brief

German Climate Takes a Deep Dive on Fear of War and More
by Robert Brusca  March 29, 2022

The GfK look-ahead consumer confidence metric for Germany is expected to plunge in April, swinging from a reading of -8.5 in March to a -15.5 reading in April. The April reading resides in the lower 1.2% of the historic queue of observations for the GfK headline This is the second lowest GfK reading since the series began in January 2002. The lowest reading on record is -23.1. The monthly drop in the headline is the third largest one-month drop on record over this same period.

The GfK metric chronicles a sudden shock as well as a deeply negative reading for German consumer confidence in April. We should view it as a sort of bellwether for Europe.

The German condition
Germany has been torn and twisted by upheavals over EMU/EU policies various, episodes with the virus, political change, and muti-decade haranguing with the U.S. over its modest contributions to NATO, and its dependency on oil from Russia. As the U.S. (Obama, then Trump) urged Germany to contribute more to NATO, the Germans insisted on dragging their feet before upping their NATO contribution to 2% of GDP, a contribution they were loath to make because they were doing so much business with Russia. Germans bought Russian gas and sold other goods. Germans did not see any reason to contribute a huge chuck of GDP to defend themselves against a business partner…until the grim reality set in. Germany has been paying down debt rather than contributing more to NATO. Trump incredibly was treated as a 'bad ally' when he threatened to pull some troops back (and did) because Germany refused to pay more for its own defense (opting to shore up its financial condition instead). Trump may have been ham-handed about it, but he was right. And Germany must have had an inkling of its true need since it really did want the U.S. presence to remain, but it did not want to pay for it. Perhaps some day we can talk about that without blood pressures rising. But German attitudes toward Russia also held-back the U.S. response to Russia as it amassed troops on Ukraine's border since, until Russia invaded Ukraine, Germany was not on board for anything but the most milquetoast of sanctions.

Post invasion…never mind
In the event, Russia steamrolled Ukraine, surprised Germans opened their eyes and the world changed before our eyes in a blink. All of this has shocked the German public and we see that in the smackdown of the GfK index in April. All those things that came before the Russian attack are now water under the bridge. Germany is looking to wean itself off Russian energy. Current energy contracts are still honored by both sides (although there have been attempted modifications as Russia has tried to get energy paid for in rubles). Germany is actively looking to arrange for LNG shipments- something the U.S. urged years ago – more water under the bridge.

Metrics for the sucker-punched German consumer
The detailed metrics for the GfK system are up-to-date through March not April. But they all are weak. Economic expectations read -8.9 in March; a drop from 24.1 in February. Income expectations are at a reading of -22.1; down from 3.9 in February. The propensity to buy index fell to -2.1 in March from 1.4 in February; this is the smallest monthly drop of the lot. Economic expectations have a 21.9 percentile standing in their historic queue of ordered responses, income expectations have a 0.4 percentile standing, and the buying climate has a 28.1 percentile standing. In terms of monthly drops, the declines are large with the economy measure falling more month-to-month only 13.6 percent of the time, income expectations fall by more month-to-month 13.6% of the time as well and buying plans slip by more in one-month about one-third of the time.

Note how 'Climate' and 'Economic Expectaions' have become closely linked since Covid

The rest of Europe? Too soon to tell
The readings for select European countries do not show the same degree of weakness, but they are not comparable either because they are not topical; they generate readings that are only pre-war readings. Italian, French and U.K. data all lag by two months, causing their sentiment samples to be drawn from what is just about a separate universe in time. We will have to wait to get up-to-date metrics to compare them.

Message here? Same as from the IFO
The readings here for the GfK survey of consumers echoes what we saw in the IFO yesterday where the survey businesses showed the current metrics were less affected, but expectations were slashed. And that's the crux of it. For now, life goes on (unless you are Ukrainian or a Russian conscript). But with war, sanctions and more supply-chain issues to come, everyone is aware that conditions will worsen. Inflation is high and eroding income already, but that has just started. The most visible signal is the price of energy, experienced at the weekly filling station visit where SUV owners may need a bank loan to fill the tank. Germany's forward-looking GfK is a good metric that gives us a taste of what Europe will be experiencing as other data become more topical.

The future holds?
There are signs that Russia has been badly hurt and is looking for a (face-saving) way out. But it is hard to judge and impossible to tell if Russia gets out that it would stay out. It already has 'found a way' to violate is promise made in the Budapest Memorandum to assure Ukraine's borders. While Russia will seek Ukraine neutrality, Ukraine will never be truly neutral after what Russia has done. Even Putin must know this in his bones. Ukraine has been pushed, pressed and crushed into the arms of the West and unfortunately the West was only there for a lukewarm embrace. Ukraine will surely know that it must fend for itself and arm itself. It has nothing to worry about from the West but little to depend on as well. Then there is the lesson for the rest of the world which is very clear: 'get thee nuclear weapons' or not-not, at your own peril. That seems to be the main fallout from Biden doctrine.

Commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

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