German Orders Continue to Run through Their Paces Exhibiting the Downside of the Cycle

German orders soured and declined in October. The revival stage of the Covid recovery seems to have drawn to a close and left nothing in its wake in the way of momentum.

Orders are falling at a 44.1% annual rate over three months; they are weaker than their 16% annual rate of decline over six months which in turn is weaker than their 1% drop over 12-months. Foreign orders follow that same script in terms of growth progressions with comparable magnitudes. Domestic orders also show the same sequential decay in orders. For domestic orders, the three-month pace of decline comes in at -35.9%, the six-month pace is -6.2%, but domestic orders show a small, 1.6%, increase over 12 months. It is still an eroding profile.

In the quarter-to-date, German orders are falling at a 42% annual rate with foreign orders imploding at a 53.6% annual rate and domestic orders contracting at a 19.4% annual rate.

Looking at where orders are in the post-Covid revival period, the results are grim. Taking January 2020 before Covid struck as a base, total orders are still lower on balance by 1.1%. foreign orders are lower by 4.5% and domestic orders are up by 4%. That's a period of 22-months and the best category is domestic orders that are up by 4% or an average gain of 0.2% per month for real orders.

The Covid question And now there is a new development with the Omicron variant beginning to take hold. The early (too-early-to-know) take on this strain is that it is more transmissible and apparently not as deadly as, so far, it has not sent many in South Africa to the hospital. But a number of young people have caught this virus and it is not clear why that is. So, we are flying blind about the impact of this virus feeling our way day-by-day as the ‘whole world' is bracing to try to find out what it will be.

Germany's Covid disaster Germany with a new incoming chancellor is taking a new more aggressive tact toward the existing virus as national and regional leaders have agreed to bar unvaccinated individuals from many activities in public life to force them to get vaccinated. Vaccination in Germany could be made mandatory as soon as February. Germany is experiencing a fourth wave of covid infection that is the most severe so far. And all of this is just about the existing virus and not about any risk from Omicron. Angela Merkel is taking a front role in this process backed up by the incoming chancellor, Olaf Scholz. The Berlin mayor has said that most of the cases of Covid are for unvaccinated people.

These are the restrictions being put in place by German officials to govern activities:

• Unvaccinated people will be limited to meetings with their own household and two other people
• The 2G rule (this refers to people recovered from Covid in the last two months or vaccinated people) will be enforced at restaurants and cultural venues and non-essential shops
• Clubs will shut in areas where 350 cases have been recorded per 100,000 people in the past seven days - the national rate is over 400
• Up to 30 million vaccinations will be carried out by Christmas - first, second or boosters
• Outdoor events, including Bundesliga football, will have limited crowds of 15,000 and 2G rules
• Fireworks on New Year's Eve will be banned (Source here).

Omicron perspective So far, 79 cases of the Omicron virus have been recorded in 15 European countries. Most are connected in some way with air-travel either directly or from contact with air-travelers from African countries.

German industrial activity Real sector sales in Germany show total manufacturing and mining sales falling at a progressively steeper pace from 12-months to six-months to three-months. Most sectors follow this pattern or at least come close without a major violation to the deteriorating sequential trend process. The exception is consumer goods where sales rise at a 5.6% pace over six months accelerating from a 0.9% gait over 12 months. Capital goods follow the script with sales easing faster over three months and with six-month and 12-month sales falling at the same pace. Intermediate goods show sales decaying from a 1.7% gain over 12 months to a -6.4% pace over six months. The three-month change is a ‘speed up' to -5.4% but still is a decline and a clear deceleration from 12-months and then again not much of a speed up compared to six-months. In short, only consumer goods show a real departure from the secular decay trend and, even so, all sectors and aggregates show real sector sales falling over three months. Only nondurables show a three-month drop pace smaller than its year-on-year pace. We can clearly conclude that German activity is mired in an ongoing and worsening pace of decline. The order data suggest strongly that the slowing is still in order and in train. Germany's Covid situation and its new ‘remedy' would seem to condemn the economy to a further period of continuing its tailspin.

The quarter-to-date (QTD) data for sector sales do show a bit more in terms of signs of life. The overall sales pictures for sales in manufacturing as a whole, sales of capital goods, and sales of intermediate goods all show incipient quarter-to-date sales increases. The QTD declines are all sequestered in the consumer goods sector- overall sales, sales of nondurable goods and sales of durable goods.

However, assessing sector sales vs. their January 2020 levels finds declines in every single sector and in all aggregate measures.

Germany and the EMU Big Four economy trends The bottom of the table features the EU industrial assessment from the EU Commission. On that metric, October finds France, Italy, and Spain stronger month-to-month with Germany weaker. Three-month averages of the EU data show ongoing industrial improvement for all countries on that sequence – a difference from the trends in German real orders and sector sales. However, in the EU data for all four countries, there is lessening improvement over three months compared to the early performances. France and Italy each improve over three months by just a tenth of a tick on their average comparisons. Germany is stronger than that on its three-monthly average gain but still slows compared to its large six-month improvement vs. its 12-month level. The queue standing data that compare each of the four countries' current metrics to their history of data back to 1990 find the best strength in Germany with a 98.9 percentile queue standing, followed by Spain at 97.9 percentile, Italy at its 94.7 percentile, and France at its 90.4 percentile. Comparisons of changes from January 2020 levels show the strongest gains are from Germany followed by Italy, Spain, and then France in that order.

Summing up On balance, Germany shows a clear path of weakness in orders and in sales. The EU Commission echoes that trend in terms of losing momentum and puts France, Italy, and Spain on the same withering trend. These are trends that formed before the discovery of the Omicron virus, so things could change a lot from what they are now in the coming months if Omicron proves to be more worrisome than we now think it is. In any event, Europe has further work to do on combating the virus and Germany is behind the curve and is now taking steps to catch up. But these are steps that ultimately will take a further toll on German growth whose trend is already slipping away.