Germany's Disinflation...

Declining inflation is a solitary bright point on a gloomy horizon…

The December German PPI number was announced today, registering at -1.20% month-over-month or +4.31 year-over-year, the lowest Y/Y rate since March of last year. This is positive, on the margin, as input costs for manufacturers’ contract - with the heavy industrial and chemical segments particularly helped by collapsing commodity costs. On balance, any benefits from this will do little to offset the contraction of global demand for pricey German exports.

Chancellor Merkel is attempting to push a €50 Billion stimulus package (counting tax cuts and other incentives –including a tax benefit for new car buyers) through the lower and upper houses of parliament this week in the face of increasingly negative employment and production data with the shadow of upcoming elections looming large over all decisions.

Projected 2009 numbers don’t appear to provide relief for incumbents. Today the Economy Ministry said Germany may contract by as much as 2.25% in 2009 - the biggest contraction since 1975, with the jobless rate projected to rise to 8.4% on average this year from 7.8% in 2008.

We’re neutral on Germany respecting that, on a relative basis, it has the strongest of any of the large EU economies. As we see it, being the strongest member of the EU is looking more and more like being the tallest man on a sinking ship.

Matthew Hedrick

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