Economy in Brief: March 2022

German new factory orders rose 1.8% in January after rising by 3% in December and by 3.6% in November. Orders are up at a 39.2% annual rate over three months; that's a sharp acceleration from the minus 9.2% rate of change over six months and a solid acceleration from the 7.4% annual rate over 12 months.

Foreign orders rose by 9.4% in January after falling 2.4% in December and rising 6.5% in November. Foreign orders are rising at a very strong 67% annualized rate over three months after falling at a 3.2% annual rate over six months and rising by 9.4% over 12 months. Domestic orders fell by 8.3% in January, blunting the increase in overall order gains. Domestic orders rose by 11.4% in December and fell by 0.7% in November. Over three months domestic orders are rising at a 6.1% annual rate, up from a minus 17.5% rate over six months compared to their 4.6% increase over 12 months. Domestic orders have been more volatile and weaker than foreign orders.

Clearly German orders are being driven by their foreign component. This is not surprising since foreign orders have increasingly more important than domestic orders going back to at least 1990. Germany is highly trade-dependent, and its manufacturing sector continues to show that. Germany is highly exposed to international events although a lot of German trade occurs within Europe and within the EMU single currency area without clear foreign exchange consequences.

Overall orders: Quarter-to-date and Covid-to-date In the quarter-to-date, total orders are rising at a 34% annual rate boosted by a 75.7% annual rate increase in foreign orders; domestic orders are falling at a 10.2% annual rate early in Q1 2022. Looking at orders back to January 2020 when COVID first struck, total orders are up by 8.8% on that timeline, foreign orders are up by 11% and domestic orders are up by 5.5%. These are reasonably firm results for real orders over a two-year period.

Real sales trends Real sales in Germany show more of a mixed trend across its component sectors. For manufacturing monthly sales are up by 1.8% in January; that accelerates from 0.7% in December and compares to a 4.3% rise in November. However, consumer goods, consumer durable goods and consumer nondurable goods sales all decelerate month-to-month. Intermediate goods sales decelerate month-to-month as well. But those trends are dominated by capital goods that accelerate and grow 3.9% month-to-month in January, after being flat in December and surging by 8.3% in November alone.

For the moment, capital goods are extremely strong and making up for some lost time. Manufacturing sales are also accelerating; they are accelerating to a 30.4% annual rate over three months from 8.3% over six months and 3% over 12 months. The manufacturing sector is gaining momentum.

By sector, consumer goods output is less linear with a 3.2% gain over 12 months turning to a decline of 0.8% at an annual rate over six months but then climbing back in the plus column with a 5.3% annual rate gain over three months. Intermediate goods accelerate steadily, rising from a 0.3% gain over 12 months, to a 1.2% pace over six months and to a pace of 8.1% over three months. Capital goods show the strongest acceleration of all; real capital goods sales are up by 3.1% over 12 months rising to a 14.8% pace of expansion over six months. That increases to 60.2% at an annual rate over three months. Clearly capital goods are driving force in the German economy right now.

Quarter-to-date and Covid-to-date Quarter-to-date real sales show strength for manufacturing where sales are up at a 24.1% pace; consumer goods are up at 3% pace; intermediate goods are up to 2.2% pace; capital goods sales are rising in the quarter-to-date at a massive 46.8% annual rate. Some of this clearly is ‘catch-up’ as sales have been weak since COVID struck. Looking at the change in sales since January 2020, total manufacturing sales are still somewhat weaker being 0.2%, below their January 2020 mark. Consumer goods real sales are 2.4% lower; intermediate goods sales are higher by 0.9% but sales of capital goods are lower by 0.7%. So, the manufacturing sector is just now beginning to gather momentum and post some pace.

Caveat outlook This, of course, is time for us again to deal with suspicions about the future. After having to make caveats over the last two years about COVID and its effect on manufacturing in the economy, on orders and on trade, there is now a war going on in Ukraine. There are huge potential consequences for Germany and for Europe because of the dependence of this area on oil from Russia. There is an ongoing dialogue about whether Russian oil will be embargoed or not. This raises a huge question mark about Germany and its potential for growth looking ahead.

So far, we have good strength in the countries that we summarize in the table: Germany, France, Italy, and Spain. Industrial measures stand in their respective 90th percentile ranking them in a data queue since 1990. Obviously, the future is clouded because of war in the Ukraine and because of European dependence on oil. For now, momentum looks good. Sector performance is solid. There are still ongoing supply-chain problems, but for now, these forces do not seem to be restraining Germany very much. However, the war in Ukraine is a new element that must be put in the uncertainty column looking ahead and it could become a huge fact and will likely restrain growth ahead.

The German trade surplus has generally been withering over the past year or so, but in January it has made a reversal and started to improve slightly. Nominal imports fell by 4.3% in January, dominating the trend for the trade account in the month. Exports also fell by 3.1%, but the bigger drop in imports caused the trade surplus to get larger. January was a race to the bottom and imports won.

Sequential growth rates tell an uneven story with exports growing 7.6% over 12 months. The pace slows to 3.4% over six months, then exports go stagnant with no-gain over three months. That part of the story is clear enough and it's an ongoing export deceleration. But for imports, the growth rates have been stronger and relatively steady at 22.1% over 12 months, at 20.4% over six months, then falling sharply to 12.6% over three months. But paired up against the export growth rates, imports are stronger by a wide margin on each of those horizons. And despite the sharp deceleration in import growth over three months, imports still are quite a bit stronger than exports over three months.

Much of what we see in these trends is related to price developments. We can make a comparison by looking at nominal versus real trade flows. However, to do that we have to look at data that are lagged by a month, since that is the most topical real trade flow data we possess. On that basis, exports appear much firmer, rising at a 12.1% pace over 12 months, at a 12.8% pace over six months, and culminating at a 31.7% pace over three months. Although those are enlivened flows on data updated through December (one-month lag; see shaded cells in the table), compared to imports they're still the weak ones. Imports are up at a 24.8% pace over 12 months, at 25.4% pace over six months and at a 59.1% annual rate pace over three months. Nominal import data continue to dominate export data even when we lag them by a month period and when exports 'wake up.'

We look at the lagged nominal data so we can compare them to the real flow data which are available topically only through December. Real flow data lagged one month show exports are up by 1.1% over 12 months, falling at a 0.7% pace over six months and then rising at a 15.8% pace over three months. Those flows compare to imports where lagged real imports are up by only 0.7% over 12 months and are lagging exports that are up by 1.1% over 12 months. Real imports fall by 1.2% over six months, again putting exports on stronger ground since they fall by only 0.7%. Real exports pickup to grow at a 15.8% rate over three months, but real imports pick up by more and reach a growth rate of 21.3% putting imports back in the lead.

Taking price out of the equation puts exports and imports on a much more even footing for growth. However, prices are in the equation. Rising oil prices and commodity prices have been part of the problem in this cycle and we can see that's one of the main forces that has been dogging the German trade deficit. Its pattern of deterioration reverses this month, not on revived exports but on weaker imports.

The PPI gain is strong The PPI in the European monetary area rose by 4.9% month-over-month in January. In December, the PPI rose by 2.7% m/m. The rate of growth for headline producer price inflation in the European monetary union is up at a 42.2% annualized rate over three months; that's an acceleration - but barely an acceleration- from its 40.6% annual rate increase over six months. Year-over-year producer prices are up at a 30.5% annual rate. These rates of growth compare to an inflation rate one year ago for the PPI that was up year-over-year at a 0.2% annual rate. This is a stunning and broad acceleration. Inflation is high… inflation is rising… inflation is accelerating broadly… and central banks, generally, still are waiting to make their first moves to head it off at the pass. That, at least, is true of the ECB and the Federal Reserve.

The PPI gain is broad Statistics and acceleration show that the PPI is accelerating in about 38% of the EMU members (and others in the table) in January compared to December whereas in December it increased in about 50% of them compared to November. Over three months inflation is accelerating in 46.2% of them; over six months it is accelerating at 61.5% of them. Year-over-year it's accelerating in 100% of the currently reporting members and others in the table. One year ago, even though inflation was much lower, it also was broadly accelerating with 78.6% of the reporters in this table showing inflation higher. While inflation continues to increase broadly and accelerate widely, the increase in Brent oil prices carries on, but oil has been steadily decelerating. The push for inflation to show more broadly cannot placed at the feet of rising oil prices. This leads us to see inflation as becoming more deeply embedded in the economy apart from oil.

Table 1