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Economy in Brief

German Orders Decline for the Second Month in a Row
by Robert Brusca  February 6, 2019

German industrial orders fell for the second month in a row. The drop produced the second substantial drop in a row for foreign orders as well with declines of 2.3% m/m in both December and November. Domestic orders fell by 0.6% in December after a 3% gain in November which itself was a partial rebound from an October drop.

Weakness encroaches: Can eight of nine growth rates be wrong?
The nine growth rates calculated for total orders, foreign orders and domestic orders over three separate horizons (over three months, six months and 12 months) show eight declines with one positive growth rate for domestic orders over six months as the only exception. The growth rates, while nearly all negative, do not monotonically decline. The year-on-year decline is the sharpest for overall and foreign orders with the three-month decline the next largest decline. For domestic orders the three-month decline is the largest drop with the year-on-year decline the second largest.

However, the quarterly growth rates show a gain for Q4 total orders and for foreign orders with domestic orders lower on balance.

Sales trends show a bit more life
Trends in real sector sales show a decline in sales in the quarter-to-date for overall sales for intermediate goods and for consumer goods. Capital goods sales are up on a quarter-to-date basis. Manufacturing sales are off over 12 months, declining over six months, but rebounding and advancing at a 3.9% annual rate over three months.

Recalibrating the orders drop
The sharp drop in the year-over-year foreign order series is the result of recent weakness, but that weakness is exaggerated by the fact that in December 2017 foreign orders had surged. That surge lifts the base for this year’s year-on-year gain and diminishes the performance of foreign order growth over 12 months. If we calculate instead the percentage change in foreign orders from a January 2018 and November 2017 average (months adjacent to December), the drop in foreign orders over 12 months scales back to -5.6% from 9.6%. And at that, the year-on-year drop is more in alignment with the domestic order drop of 3.2%.

But there is no re-writing history
Recalibrate if you will, but there is no way around the conclusion that Germany is weakening. The ZEW survey, the IFO survey, the Markit PMI diffusion indexes for both manufacturing and services show weakness and substantial weakness compared to the past four years. And the Markit data put EMU and the other large EMU economies in the same fading spotlight. Germany has been running a policy of restrictive fiscal surpluses and that policy may be taking a toll on growth as tax revenues are slowing. NATO is on Germany’s back to make sure that it does not cut its NATO pledge to meet its domestic fiscal budget objective. Germany has responded that it supports its 1.5% of GDP pledge on defense spending, but Germany, the richest European NATO member, has been pressured to lift its contribution to 2% of GDP. This is something it has agreed to do but has not put any timeline on achieving it, so using a good Brooklynese expression we can say FUGGETTABBOUDIT.

Brexit negotiations reveal some inner truths...
Meanwhile, overnight some inflammatory Brexit comments from EU Council President Donald Tusk rather revealed that his negotiating strategy all along may have been to try to force the U.K. back into the EU. Tusk said on Wednesday that he had abandoned hope that Brexit might be stopped. (Was that his job?) He also said that those who promoted Britain’s exit without any understanding of how to deliver it deserve a “special place in hell.” I dare say that those in the EU who negotiated disingenuously with the U.K. or that stonewalled them and deprived them of reasonable avenues of compromise for the purpose of making Brexit such a stark choice that it would be abandoned will also be a reserved a special front row seat with a short poker by Dante.

I have suspected all along that much of the EU hard lining on the U.K. has been to try to force them back into the EU or to make it clear that leaving the EU will require such sacrifice that no one would dare try it again. This negotiation process has always been a bit of Kabuki. Finally, that is out in the open. It has not been about resetting a new relationship with an old friend and it has been especially remiss to recognize the special place the U.K. should have in the heart of all Europeans for its amazing steadfast role in World War II. Europe exits in the form it is today largely because of the efforts and hardships endured by the U.K. Even now the U.K. has the only real military capability in Europe. And while NATO and the EU are separate organizations, it should be clear that the U.K. will continue to make special contributions to European security that the EU is simply not willing to recognize that. So who is the real free-rider? The U.K.’s Brexit is being made much more painful than it needs to be and the bureaucrats of the EU are using their iron fist to crush the U.K. instead of admitting that there is a lot of dissent within the EU itself about some of the same issues that ultimately lead the U.K. to vote to leave. Clearly, the EU is still trying to suppress that. Tusk is just being a ‘good bureaucrat’ if you’ll pardon that oxymoron.

This is not the EU’s finest hour. And Donald Tusk has distinguished himself as a hard headed, iron fisted, inflexible bureaucrat. I wonder what U.S.-EU trade negotiations are going to look like? That will be a negotiation where the EU does not hold all the cards - far from it. And Donald Trump is no Theresa May.

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