German Recession Near Certainty As As New Orders And Industrial Output Continue To Fall

``The worst is still to come for manufacturers,'' said Carsten Brzeski an economist at ING Group in Brussels. ``The industrialized world is heading for a recession and the German economy is in the middle of the storm.''

Industrial production in Germany declined the most in almost 14 years in September, meaning that a Q3 contraction (and hence a recession) in Europe's largest economy is now more or less a "done deal". Output was down a seasonally adjusted 3.6 percent from August, according to data from the German Economy Ministry in Berlin earlier today (Friday). Year on year earlier, production adjusted for working days fell 2.1 percent.



German companies are scaling back production as the global economy buckles under the weight of the credit crunch and the impact of higher borrowing costs, hurting export markets and causing consumers to cut back on spending as they worry about the outlook for their jobs.

The September drop in manufacturing was led by a 7.2 percent slump in the production of durable goods like washing machines, computers and televisions.




Manufacturing Orders Drop At A Record Rate


And the output for the coming months doesn't look any brighter. Manufacturing orders dropped by a record in September, led by a sharp drop in foreign demand for factory machinery, with s easonally adjusted constant price orders falling 8 percent from August, when they rose 3.5 percent. This was the largest drop since records for a reunified Germany began in 1991.

German business confidence - as measured by the ILO institute index - fell to the lowest level in more than five years in October.




And the manufacturing PMI for Germany showed contraction at the fastest pace in seven years in October.




So the German economy seems to be well mired in recession just as the International Monetary Fund (IMF) warn that the majority of OECD economies face their first year of full contraction since World War Two in 2009.

The Spanish Agony Continues With October Services Hitting A Series Low

Well, just as you think it is getting really bad, you find out it can only get worse. I keep saying I have never seen anything like what is now happening in Spain, and that is undoubtedly true, but in the end you get tired of simply repeating the same point time after time, day in day out, on one occassion after another.

Services Activity Falls At A Record Rate


Spain's service sector shrank in October at a record pace with the Markit Purchasing Managers' Index for Spain dropping to 32.2, a second consecutive record low and the tenth consecutive month of contraction. The index was down from 36.1 in September, which at the time really seemed very, very low, and evidently well below the 50.0 level which separates growth from contraction.

"There is no immediate light at the end of the tunnel for firms in the Spanish service sector as activity continues to fall at an alarming pace," said Andrew Harker, economist at Markit Economics."The explosive combination of falling output charges and rising input costs has made it very difficult for businesses to make profits."

Global Services Contract

Outside Spain, service sector activity in the euro zone hit a fresh decade low in October pulled down in part by the very low reading in Spain, and a quite low one in Italy (45.7). The final Markit Eurozone Purchasing Managers' Index slumped to 45.8 the lowest in the survey's 10-year history. The fact that the final reading is significantly below the flash estimate (of only one week ago) and sharply down from September's 48.4 would seem to indicate that the contraction in services is accelerating rapidly at this point across the eurozone.

Global services activity also slumped to its lowest level since 2001 in October, dragged down by the especially weak European service sector, according to the Global Services Business Activity Index, produced by JP Morgan, which plummeted to 44.2 in October from 50.2 in September.

That was the second lowest result in the survey's 10-year history, behind only the month after the September 2001 attacks in the United States.


European Sovereign Yield Spreads Widen

The yield spread between German 10 year bunds and some other eurozone sovereign debt of equivalent maturity is currently the largest since 1997, with investors demonstrating a preference for only the most liquid government bond markets as the implications of the scale of the European bank bailout begin to dawn on the financial markets. The gap between bunds and their Italian counterparts widened to 127 basis points earlier in the week, while difference with Spanish 10-year debt shot to 69 basis points following the news that the country's economy contracted in the third quarter for only the first time since 1993.



Also we learnt earlier this week that credit-default swap traders were prepared to bet more on the risk of default for Italian and Spanish government debt, and for Deutsche Bank than they were willing to put on any other comparable risk wager, according to a Depository Trust and Clearing Corp. report that gives us the most extensive data yet on the credit-default swap market.

A total $33.6 trillion in transactions are currently outstanding on government, corporate and asset-backed securities worldwide, based on gross figures, the DTCC said in a report released Tuesday. After allowing for overlapping trades, the report found that investors have taken out a net $22.7 billion of contracts based on Italy's debt, $16.7 billion against Spain and $12.5 billion on Deutsche Bank of Frankfurt.

The DTCC, which operates a central registry of credit swaps trades, released the data for the first time this week as the industry steps up efforts to counter critics among lawmakers and regulators who blamed the lack of data for exacerbating the financial panic.

Investors have focused their wagers on debt associated with those industries and countries that may be most affected by a credit crisis which is now entering its 15th month. The Spanish economy is seen as particularly vulnerable as it enters its first recession in 15 years amid a slump in its housing market, with banking and finance shares dropping as the credit seizure piles the pressure on builders and property devopment companies and the danger of a sector collapse increases the risk to the banks.

Credit-default swaps on Italy were quoted at 108 basis points yesterday after reaching a record 138 basis points on Oct. 24, CMA Datavision prices on 10-year contracts show. The contracts have more than doubled since August. Yesterday's trading represents a cost of $108,000 a year to protect $10 million of debt for 10 years. Contracts on Spain climbed to 112 basis points on Oct. 24, from about 47 basis points at the start of September. They have since dropped back to 79 basis points.

Turkey, Italy, Brazil, Russia, GMAC LLC, and Merrill Lynch had the biggest gross amount of contracts outstanding on their debt as of Oct. 31. Turkey alone had $188.6 billion of default swaps written against its debt. The gross figure however doesn't take account of offsetting trades. After netting the trades, there were, for example, only $7.6 billion outstanding on Turkey's debt, giving a final number way below the Spanish and Italian values.

Manufacturing Falls Off A Cliff And Unemployment Goes Through The Roof In Spain, As Global Manufacturing Plummets

Spain's manufacturing sector continued to shrink at a record pace in October, with both output and new orders contracting and employers shedding jobs at a near record pace, according to the latest Markit Economics Purchasing Managers Index published yesterday (Monday). The Markit PMI for Spain dropped to 34.6 in October, the lowest reading registered by any eurozone economy since the series began in February 1998 and down from the already rapid 38.3 point contraction in September. On the PMI system any figure below 50.0 shows contraction while figures over 50.0 show growth. As we can see, according to this indicator Spanish manufacturing has now been weakening steadily since the start of 2006.

Manufacturers reduced their workforce as production requirements fell, with staffing levels declining at the steepest pace in the survey's history. The survey has reported falling employment every month since and including September 2007. Output in the Spanish manufacturing sector fell at a series-record rate for the second consecutive month driven by a lack of new orders, which have fallen every month since February. New business levels also declined at the fastest pace since the survey began according to the report.


Unemployment Rises by 192,658 (or 7.3 percent) in October

The number of people out of work in Spain leapt to a 12-year high in October, and Spanish unemployment was at the highest level of any of the countries in the euro zone. The number of registered unemployed increased by 192,658, or 7.3 percent, in October from September, marking the biggest jump in seven straight months of increases, according to data published by the Spanish Labour Office (INEM) today (Tuesday).

The total number of job seekers reached 2.82 million, up 37.5 percent from a year earlier, and the highest level since April 1996.



The worst rise in unemployment was in services, with 113,720 more people signing on as unemployed. That was followed by construction with a 36,275 increase. The October increase in Spanish joblessness dwarfed the rise of 31,214 in October 2007 and was nearly twice the size of the previous biggest increase this year of 103,085 in August. Immigrants were hardest hit, with the number of foreigners claiming unemployment benefit up 46 percent in October to 337,493 from 181,820 a year earlier.



The monthly figure followed third quarter data that showed Spain's unemployment rose to 11.3 percent, which was the highest level in the 15-member euro zone. The European Commission expects Spanish unemployment to rise to 15.5 percent in 2010, although some analysts are arguing the level may get near to 20 percent by the end of next year.

In one measure to cushion the impact of rising joblessness, the Spanish government said yesterday that it would allow unemployed workers to delay making half their mortgage payments for up to two years. Under the mortgage relief plan, about 500,000 unemployed people with mortgages of less than €170,000 will be able to postpone half their monthly payments for the next two years and repay the money after January 2011. As with some of the earlier government plans, the full details still remain unclear, although it seems banks are to be expected to bear some of the cost, although they are likely to benefit from lower default rates from those taking advantage of the offer.

The measure forms part of a new round of emergency initiatives designed to soften the impact of the economic crisis. In addition to the mortgage relief, José Luis Rodríguez Zapatero unveiled tax benefits and financial incentives designed to help home-buyers and promote job creation, especially in industries such as alternative energy that the government wants to promote. The latest measures to boost employment are estimated to have a cost about €170m over the next two years, but this is really chicken feed in comparison with the €50bn of Spanish banks’ assets the government has agreed to buy up , and €100bn offered in support of bank borrowing. The government has also offered €3bn in credit to allow property developers to use their construction loans for other purposes. But the sum total of yesterday's package is so small in comparison with the magnitude of the problem that it is now more a sign of weakness than one of strength, and obviously more, much more, should have been done a long time ago, while really I have the feeling we are now all reduced to the rank of spectators waiting to see what actually gets to happen. It is all somehow just like one of those awful "whatever happens next" horror movies, which is a pity, since it didn't have to be like this, not at all it didn't.

The JP Morgan Global Manufacturing Index Plummets Too


The October contraction in Spain, while possibly the worst among the developed economies, is part of a general pattern. Indeed the latest JP Morgan Global PMI report really does makes for quite depressing reading.

The world manufacturing sector suffered its sharpest contraction in survey history during October, as the ongoing retrenchment of global demand and further deepening of the credit market crisis negatively impacted on the trends in output, new orders and employment. The JPMorgan Global Manufacturing PMI posted 41.0, its lowest reading since data were first compiled in January 1998 and a level below the no-change mark of 50.0 for the fifth month in a row.

Output, total new orders and new export orders all contracted at the fastest rates in the survey history in October. With the exception of India, which again bucked the global trend, all of the national manufacturing surveys posted declines in output and new orders. The impact of the downshift in global market conditions also had a far-reaching effect on international trade volumes. Although new export orders fell at a slower rate than total new business, all of the national manufacturing sectors covered by the survey (including India) saw a reduction in new export orders.

"October manufacturing PMI data reinforce the stark retrenchment that the sector is currently facing, with production, total new business and new export orders all falling at record rates. The latest Output Index reading is consistent with a fall in global IP of almost 8%. The only positive from the surveys was a decline in input prices for the first time since August 2003."
David Hensley, Director of Global Economics Coordination at JPMorgan

Economies across the Eurozone are being affected. In Italy manufacturing activity contracted at the fastest rate in at least 11 years in October according to the latest Markit/ADACI PMI survey out yesterday (Monday). The Markit Purchasing Managers Index fell to 39.7, its lowest since the series began in 1997, down from 44.4 in September. The Italian manufacturing PMI has now not been above the 50 mark separating growth from contraction since February and the latest data showed activity falling at an accelerating pace as demand shrank while jobs were shed at the fastest rate in the history of the survey.



Other recent indicators from Italy have also been far from encouraging, with October business confidence hit its lowest point since September 1993, when the economy seized up after Italy was rocketed out of the European Exchange Rate Mechanism a year earlier.



Germany's manufacturing sector contracted in October at the fastest pace in seven years as incoming orders and output experienced their sharpest declines in more than 12 years. The headline index in the Markit Purchasing Managers Index for what is Europe's biggest economy fell in October to 42.9 from 47.4 the previous month, well below the 50 mark that separates growth from contraction.

The French manufacturing purchasing managers index was revised down to a series low 40.6 in October, down from both the 'flash' estimate of 40.8 and September's 43.0 figure, Markit Economics said in a press release issued on Monday.

Disaggregating the figures, the output component fell to an all-time low of 37.8 from September's 41.7 level, while new orders slipped all the way to a series low of 34.9 for the month, down 2.6 points from September's 37.5 level. Purchase quantities and new export orders also saw some new record lows in October, falling to 33.7 and 38.5 respectively.



Eastern Europe


Hungary's manufacturing industry contracted sharply in October, with the PMI dropping 5.2 points to hit 44.7 in October - a historic low, and 0.8 points below the previous worst reading registered in October 1998, according to the latest data from the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM).

In Poland the ABN Amro Purchasing Managers Index fell for the sixth month running to 43.7 (down from September's 44.9) a record low and well below the neutral reading of 50, according to Markit Economics yesterday. In the Czech Republic, manufacturing output contracted for the seventh month in a row, and the index hit an all-time low of 41.2, just above the revised euro zone figure of 41.1. As the Eurozone itself contracts, these economies which are heavily dependent for exports to the zone will be buffeted, especially now that forex loans for their domestic housing markets have all but dried up.




US Manufacturing

The US manufacturing PMI dropped back to 38.9 in October from 43.5 in September, indicating a significantly faster rate of decline in manufacturing when comparing October to September. It appears that US manufacturing is experiencing significant demand destruction as a result of recent events. October's reading is the lowest level for the US PMI since September 1982 when it registered 38.8 percent. On the other hand inflationary pressures are evaporating rapidly, and the Prices Index fell to 37, the lowest level since December 2001 when it registered 33.2 percent. Export orders also contracted for the first time in 70 months.


The BRICs

China's PMI dropped to lows not previously seen in October, confirming that the economy of the so-called factory of the world is now decelerating along with everyone else. Two international surveys measuring the PMI independently corroborated the evidence of a cooling Chinese industrial economy.

According to a survey complied by securities firm CLSA, China's PMI fell to 45.2 in October, its third consecutive drop, from 47.7 in September, as new orders and exports, as well as pricing power, were squeezed by the global financial crisis.

"The very sharp fall in the October PMI confirms that China is more integrated into the global economy than ever. Chinese manufacturers are seeing their order books cut, both at home and abroad, as the world economy falls into recession," said Eric Fishwick, CLSA's head of economic research, in a report released Monday. "Costs are falling but so are output prices. The coming 12 months will be difficult ones for manufacturers, China included."

The government-backed China Federation of Logistics purchasing managers' index - published on 1 November - also showed a strong contraction, falling to 44.6 in October, the lowest level since the data began in 2005, from 51.2 in September



Russian manufacturing contracted in October at the slowest pace in over two and a half years as the global financial crisis cut demand, according to the latest reading on VTB Bank Europe's Purchasing Managers' Index, which fell to 46.4 from 49.8 in September. This was the third consecutive month in which Russian industry has been contracting.





Business conditions in the Brazilian manufacturing worsened in October for the first time since June 2006. The headline seasonally adjusted Banco Real Purchasing Managers’ Index (PMI) posted 45.7, down from 50.4 in September, pointing to a sharp contraction -the fastest in the survey history in fact. The PMI was driven down by accelerated declines in output and new orders, as well as falls in employment and stocks of purchases.

Even in India the seasonally adjusted ABN Amro India Manufacturing Purchasing Managers’ Index dropped steeply in October, falling to a record low of 52.2, down from a reading of 57.3 in September suggesting another sharp deceleration in growth, even if Indian industry managed to keep expanding. The biggest fall was in the new orders sub-index, which dropped to 54.4 in October from 62.6 in September. Perhaps the saving grace in the Indian survey is that most firms said demand remained strong in domestic markets, while it had been international orders which had waned. This can also be seen from the new export orders sub-index, which contracted to 49.7 for the first time in the history of the series. That fits in with the latest data showing that Indian year on year export growth slowed to 10.4% in September. Thus the Indian expansion is still hanging on in there, by its fingernails, but it is hanging on in.