EYE ON GERMANY: More Negative Data Points with a Pinch of Optimism

Today the Federal Statistics Office in Germany reported the following Q4 ‘08 data on a quarterly basis:

-Exports declined 7.3%
-GDP fell a seasonally adjusted -2.1%
-Consumer Spending dropped -0.1%

Additionally, IFO sentiment data released yesterday was marginally worse, yet in line with estimates.

IFO Sentiment data for February registered a tick downward with the Business Climate index (based on a survey of 7,000 executives) at 82.6, down from 83 in January, in line with expectations that the index wouldn’t move dramatically. The Ifo’s gauge of current conditions also fell, declining to 84.3 from 86.8, while the measure of expectations rose to 80.9 from 79.5. A separate survey, the ZEW, reported that German investor confidence rose to -5.8 in February from -31 in the previous month, the biggest jump in 15 years.

German data remains a primary focus for us, as it is the country with the largest European economy and the strongest credit (based on yield). Germany provides an important pillar for which to compare the relative health of Europe against.

The DAX has had numerous nasty closes in the last two weeks and is down -19.01% YTD. That’s worse than the YTD performance of the SP500. Despite the anticipation of Chancellor Merkel’s stimulus program, which at 1.6% of GDP is the biggest spending package in Europe, the economy cannot recover from domestic tax cuts and infrastructure investments alone. In Keynesian economic policy does anyone trust?

Germany, as an exceptionally export dependent economy, is equally levered to the health of the global economy. As the global recession continues so too wane, so does the world’s appetite for German goods. GDP slumped 2.1% in Q4 ’08 on a quarterly basis (the biggest drop in 22 years) and the economy is estimated to contract 2.5% this year according to the IMF.

We expect the ECB to reduce its benchmark at least 50bps to 1.5% at its next policy meeting on March 5, which will in part benefit countries like Germany by weakening the Euro to make exports more attractive. Despite the bearish data points from Q4, the jump in investor confidence is bullish on the margin, and one of the many factors we’ll have our Eye on.

Matthew Hedrick

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