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Economy in Brief

German PPI Soars In July But Still Slows Its Rate Of Growth
by Robert Brusca August 19, 2010

Spring time for Germany...This is a unique time for the German economy. It is growing fast, having put in the best quarterly growth since unification; the best quarter in two decades and a strong one compared to any decade. Inflation has been under control. The euro, now the German currency, but no longer a proprietary one (a key point, here), has steadied after a period of weakness. Inflation has been subdued in the key HICP measure but PPI inflation has been rogue for some time. But this month, despite a larger-than-what is-persistently-tolerable increase in the PPI, that gauge is decelerating over three-months. But that deceleration owes to a May rise of just 0.1% and next month in the three-month calculation May drops out leaving a 0.4% for July and a 0.5% for June. The six month rate of PPI inflation has slowed too, the year-over-year measure has only crept higher.

Bundesbank kicks its forecast up a notch - Germany is an unusual 'winder' economy so far in this cycle. It is very unusual for Germany to lead the OECD out of recession. But the economy is strong and the Bundesbank has just notched its forecast for growth up. It is not treating Q2 GDP as a one-off ignorable affair The German Q2 growth rate of 9% is a signal, not just a flash in the pan. The Bundesbank now expects growth in 2010 to reach 3%, lifting its previous forecast from the 1.9% mark. But that shift is not as much a shift as it may seem. With one quarter of 9% (SAAR) growth under its belt that forecast is still pretty conservative. Still, Germany is not in denial. The Bundesbank even projects that businesses and consumers will accelerate spending. Let's hope so. Germany 'owes us' at least that much.

Growth? Bah! Humbug! Or Germany as the roach-motel for Growth - One of the missing ingredients in Germany is the consumer. And now Germany is spreading its growth-killing agenda. German net-exports have been 'poaching' domestic demand in other countries turning it into German growth and killing the multiplier effect by damping consumer spending at home. On the margin, if we had it to choose, we would rather see exports booming in a country where growth stimulus would lead to a large round of consumer spending. That would spread the expansion and spur job creation. But Germany, under the reign of Angela Merkel, has made it clear, beginning with the European, then the G-20 economic summits, that its agenda is austerity. So Germany is taking the sparks of growth from other economies and dousing them with its wet austerity blanket. German has become the roach-motel for growth. Growth comes in (and mends German finances) but none comes out. That's the roach-motel model.

High growth as a low contribution: a Paradox? - Let's remember that while this seems a paradox in the face of Germany's strong GDP growth, the point is that Germany is benefiting from domestic demand elsewhere. Remember this simple relationship: Supply ≠ Demand. Supply and demand are different things. If Germany did not export to exploit overseas demand, someone else would and that economy might respond differently to a jolt of export-led growth. Germany is taking the proceeds from its export sales and it is not magnifying them. It brings them to an economy where whose domestic demand is nil. They wind up helping Germany repair its fiscal position. It leaves the need for more global demand unsatisfied. Domestic demand, not GDP, is what a country contributes to global demand. Germany is contributing to global SUPPLY at a time when supply is in excess! It is taking a huge chunk of demand while demand is scare and it is not passing it on. It is gobbling it up for its own purpose. The Bundesbank forecasts that this will change, Again, let's hope so.

Medicated Goof – Meanwhile, Germany occupies an important seat on the ECB. Its people dominate the research agenda. The ECB adopted a German-like anti-inflation culture. To do so it populated itself with Germans. The lifting of the German PPI is a warning shot to those who hate inflation. And if the economy that is producing inflation is also growing better-than-expected all the more reason to turn the screws that damp growth. Fortunately the ECB targets consumer inflation (HICP) not the PPI. More correctly (but less grammatically) I could say that the ECB 'ceilings' inflation, since it sets a ceiling for it not a true target. Still, the risk is to the rest of the Euro-Area where growth is nowhere near as good as it is in Germany. In other European nations austerity plans are expected to moderate second half growth. Of course, after this strong Q2, Germany's growth will moderate as well, but that will be in a different context. Not surprisingly, markets did not act with full enthusiasm to German and European growth in Q2 as the results were way better than expectations; no one quite knows what to expect next and the details of the stunning German-European Q2 GDP performance are not yet known. Still, the risk here is that the German economy, Europe's largest could set the agenda for monetary policy in a region where some countries require a very different sort of medication. Dear doctor, please prescribe me both a stimulant and depressant, signed the Euro-Area. Good luck with that.

Germany PPI
  %M/M %-SAAR
  Jul-10 Jun-10 May-10 3Mo 6Mo 12Mo 12Mo
PPIxConst 0.4% 0.5% 0.1% 3.7% 4.5% 3.7% -4.3% 3.6%
 Ex Energy 0.1% 0.2% 0.5% 3.1% 3.7% 2.4% -3.4% 2.3%
Harmonized 0.3% 0.5% 0.1% 3.7% 4.2% 3.6% -4.3% 4.0%
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