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Economy in Brief

German Economic Climate to Reach New 'All-Time' Low in May
by Robert Brusca  April 27, 2022

The GfK consumer climate measure for Germany is the earliest reading for the consumer in the month of May. That's not surprising since it is not yet May; the GfK index projects confidence and climate for the month ahead. This look-ahead gauge German consumer climate at -26.5 is now the lowest reading in the history of this series. This data-series begins in January of 2002, so it is not as long-lived has some other measures of consumer attitudes. However, this period does contain the Great Recession and its financial crisis as well as the period when COVID struck. This is not an 'easy period' for comparisons. Carving out a new low in May is an unexpected development. Some modest deterioration had been expected.

The reading comes as there are new developments surrounding the war in Ukraine and Russia. Russia's foreign minister yesterday was once again quoted talking about the risks of a broadening conflict and the potential to start World War III in addition to doing some saber-rattling about the potential for nuclear weapons to be put in play. These are all terrible things to talk about even in the best of times. They are terrible things for a foreign minister to be putting on the table as though they are policy options and selling them as though they are inadvertent risks. Russia after all is not a 3-year-old who has not yet learned to color in his coloring book and stay within the lines. Russia knows where the geopolitical lines lie. It knows where national borders lie. And it knows the rules that govern the use of various exotic weapons that apply even in the time of war. To suggest that something could go wrong that there was some unexpected risk, it's simply a figure of speech for making a threat.

Yesterday Russia made a part of its new threat package real by announcing it was cutting off the gas shipments to Poland and to Bulgaria. Poland, of course, has been outspoken about the risks of Russia and the need to do more to help Ukraine, to stop Russia, and to contain it. It's not surprising that Poland would be the first target pressured by shutting off gas supplies. Poland claims it has prepared to this move.

The geopolitical and economic environment
In responding to this survey, Germans are reacting to ongoing developments in the theater of war as well as rising inflation of which high energy prices are a key component. The war is both abstract and real. It is having a real impact on consumer lives and budgets as well as a worrying impact and what will be happening now that Russia has emerged as a live military threat.

The German government is getting ready to release a new forecast in which it will cut growth sharply. It has been pre-announced it will be looking for 2022 growth of around 2.2%, sharply lower than the 3.6% mark it had been looking for previously.

Survey details
The drop in the index takes it from a reading of -15.7 in April to -26.5 in May, an extremely sharp month-to-month drop – the largest month-to-month drop on record, in fact. Components of the index are available only for April; they are not up-to-date through May. But the April readings saw the economic cycle component falter to -16.4 from -8.9 in March, income expectations fell to -31.3 in April from -22.1 in March, and the propensity to buy fell to -10.6 in April from -2.1 in March.

The standings of the components underscore this weakness as well. I've already mentioned that climate is at a new all-time low. Income expectations also are at an all-time low, economic expectations sit in the lower 12-percentile position of their historic queue of values. This means that only 12% of the observations for economic expectations have been weaker. In addition, the propensity to buy sits in the lower 22nd percentile of its historic queue of data as well.

With such large monthly drops and with low level readings, it's not surprising that there's more talk about recession globally. The official German forecast is going to be trimmed, but it will still be looking for reasonable growth for the rest of the year. However, circumstances have deteriorated sharply, and we should be wary about any change in the outlook to come. The IMF has just finished rejiggering its forecasts and it made substantial reductions in its outlook as well.

Elsewhere in Europe
We have readings from three other European countries on their consumer confidence measures and all of them lag Germany in timeliness. Because the German unraveling is so recent and because the new record occurs in May, a month from which we don't yet have data, it's reasonable to think that readings for other countries that lag are not going to be as extreme as the German reading. And that, in fact, is the case. But Italy shows a drop in its index to 100.8 in March from 112.4 in February. France shows a drop in its index to 88.2 in April from 89.9 in March (the most recent French reading is for April). U.K. reading, also for April, falls to -38 from a reading of -31 in March. We still see a weakening across the board in these indicators. The confidence measured for Italy sits in the 54.6 percentile in its historic queue of data; France sits in the lower 23rd percentile; the U.K. index resides in the lowest one percentile - an extremely weak reading.

Outlook and risks
The risks to this economic expansion have simply risen. The virus refuses to go away although it circulates in a much more benign form; however, the response in China is magnifying the impact of the virus on the global economy. The global economy has not recovered from the pandemic and there is an ongoing shift in supply as firms are seeking more sustainable and dependable supply chains for their production. Finally, the war has recast the entire post war period. At one time it was conjectured that the fall of the Berlin Wall signaled “the end of history.” However, it now appears that history simply marches on. The way we were remains the way we are. There has been little learning from past mistakes. That in and of itself casts the future in a much grimmer light.

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

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