Germany's Recession Becomes Official

The German economy contracted more than most analysts expected in the third quarter, entering what now appears to be its worst recession in at least 12 years as both exports and domestic spending continue to fall. German gross domestic product dropped by a seasonally adjusted 0.5 percent from the second quarter, when it fell by a revised 0.4 percent, according to data from the Federal Statistics Office earlier today (Thursday). The Germany economy last had a two quarter contracted of this magnitude back in 1996.




And all the signs are that the fourth quarter will be worse than the third one, so the situation may even surpass the 1996 recession.

``The headwinds of the financial crisis and the global economic slowdown are
blowing right in the face of the German economy,'' said Carsten Brzeski, an
economist at ING Group in Brussels. ``Even more worrying, the full impact of the
financial crisis still has to unfold. Anecdotal evidence and leading indicators
are scary.''

And the 2009 outlook promises to be even worse. Only last week, the International Monetary Fund forecast economic contractions for the U.S., Japan and the euro region next year, with Germany's economy expected to shrink by 0.8 percent. The European Commission accepted last week that the entire 15-nation euro region is probably already in a recession. Just over 40 percent of German exports go to other euro-area nations. Eurostat, the European Union's statistics arm, will publish third-quarter growth data for the eurozone tomorrow.


Quarter-on-quarter positive side of the GDP growth balance sheet came from a slight increase in the final household consumption and government expenditure of households as well as an increase inventories. Imports were up significantly (largely due to the rise in oil prices - oil peaked around $147 a barrel in July, while exports dropped, thus movements in the net trade balance had a negative impact on final GDP.

The German economy did, however, continue to create jobs, and third quarter employment - at 40.5 million persons - was up by 582,000 persons (or 1.5%) on a year earlier.

Looking forward a little into Q4, the signs, as I said, are for deterioration rather than improvement, as can be seen from the fact that (according to the PMI) German services contracted for the first time since January in October.


While the manufacturing contraction which started in August really began to pick up speed.

Inflation Is Dead In Spain, Fasten Up Your Seat Belts For A Sharp Dose Of Deflation

As Barcelona-based property consultants Aguirre Newman publish a report that suggests Spanish property prices may need to fall by at least 23% for the market to return to any kind of normality, we learn today that Spain's annual inflation dropped almost a full percentage point to 3.6 percent in October, according to data from the Spanish National Statistics Office. This was the lowest level in a year as energy and food costs fell and the real economy slowed dramatically. October's figure, in line with estimates, was down from 4.5 percent a month before, but this piece of information obscures more of Spain's current inflation dynamic than it actually reveals.

The slowdown in inflation over the last few months is evident in the chart below.

"Headline figures reflect energy and food price falls. The most interesting thing is the substantial drop in core inflation, which is a very clear sign of a more fundamental slowdown in the overall economy," said Daniel Antonucci, economist at Merrill Lynch.

But this slowdown in annual inflation isn't the important point, the big news, and the part most analysts seem to be missing, is that the price index peaked in June (as can be seen in the chart below, and whether you measure on the Spain general index or the EU HICP), since which time it has been falling, and from now on (barring the slight possibly of a minor "blip") it looks like it is going to be downhill all the way. From all the indications we have at present we should be ready for quite a sharp fall in Spanish prices in 2009 (possibly 2-3 percentage points).

The reasons why we should expect a fall are evident, we are heading for a global recession in 2009, energy and commodity prices will all be y-o-y negative, house prices, rents, factory gate prices etc etc, all look set to fall as profits get squeezed, and wage and salary earnings - if not direct base salaries - also fall. As the headline in newspaper the woman sitting opposite me in the metro this morning was reading said "Rebajas Hasta El Pan" (The "sales discounts" even reach bread).

GDP is about to start shrinking fast:

While unemployment is rising at this point almost exponentially:




I would say that the practical economics of this situation are now obvious, but for some more general theoretical explanation of why we should now expect to see deflation raising its ugly head across one economy after another see Claus Vistesen's "The Global Economy – Is Deflation the Next Macro Story?" post. And for more details on the current macro economic background you could try my Spain's Services PMI Contracts At Record Rate In October

Industrial Output Falls Again In September, Making An Italian Recession A Certainty

Italy probably entered a recession in the second half of 2008, International Monetary Fund and European Central Bank board member Mario Draghi indicated last month. After GDP contracted 0.3 percent in the second quarter, ``the most recent indicators confirm negative signs,'' Draghi said on Oct. 21. Europe's fourth- biggest economy will shrink 0.1 percent this year and 0.2 percent next year, the IMF said separately.

Italy's industrial production fell by the most in almost 10 years in September, confirming my impression that Europe's fourth-biggest economy is already in a recession. Output was down a seasonally adjusted 2.1 percent from August, the national statistics office said this morning (Monday).




Year on year, working day adjusted output fell 5.7 percent.





Italy's economy contracted 0.3 percent in the second quarter and is now in the midst of its fourth recession so far this century, or at least all the data we are seeing point that way. Most of the forecasts expect either stagnation (EU commission, Italian government) or contraction (Confindustria) in both 2008 and 2009. The pace of the decline is faster than most of the rest of Europe (excluding Spain), and the slump in sales has forced Italy's largest manufacturer, Fiat, to consider cutting the company's financial goals for the first time since the company returned to profitability in 2005.

Gross domestic product will stall for two years straight after expanding 1.5 percent last year, the European Union's executive arm said in a report published in Brussels today. Italy last stagnated in 2003, according to the national statistics office, Istat.

October Production Also Seems To Have Fallen

Italian manufacturing activity continued to contract - and at the fastest rate in at least 11 years - in October according to the latest Markit/ADACI PMI survey. 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. As we can see in the chart, the PMI has been giving a pretty reliable picture, and it looks virtually certain that, at least as far as manufacturing goes, the worst is yet to come.



Other recent indicators 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.



Falling Retail Sales


Euro-Zone retail sales fell again in October, with the index dropping from 46.2 in September to 44.3 in October, according to the latest retail PMI, the fifth consecutive month of sales contraction and one of the steepest declines recorded since the survey began five years ago. Sales fell in Germany, France and Italy as retailers reported the adverse effects of the global financial market turmoil, rising job market insecurity and stretched household budgets. Italy saw the steepest drop in retail sales of the three countries covered. The rate of decline accelerated sharply during the month with the month-on-month decline in the index the largest yet recorded by the Italian survey. (The index plunged from 42.8 to 34.8).






Confindustria recently said Italy was in "the darkest moment of the economic and financial crisis" and that government action was urgently needed to halt a recessionary spiral, noting in saying so that Italy's huge debt burden acted as a real brake on its options, and who am I to disagree. And is Italy actually in rcession? Well ISTAT are about to publish its first preliminary estimate for Italy's third-quarter GDP on November 14, so we will all soon know.