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Research Edge Position: No Active Position

A German survey points to an optimistic outlook; a number of new fundamental data points confirm that economic improvements will be mild.

GFK survey reports are signaling that the worst may be over for the German economy as its consumer climate index remains stable for May, with economic expectations improving marginally and consumer propensity to buy unchanged, but at a healthy level. Concerns over income and joblessness remain, yet in aggregate the survey is signaling the steep contraction of the German economy is bottoming out.

The survey provides an optimistic outlook, yet the fundamentals continue to yield a modest forecast for stabilization late this year and mild growth starting early next year. German GDP contracted 3.8% in Q1 on a quarterly basis according to the German Federal Statistics Office. For the export-dependent economy it comes as no surprise that the decline was mainly due to the balance between exports and imports. This will continue to be a headwind for the economy. The chart below shows this steep decline. 

Based on the previous quarter, Q1 exports declined 9.7% while imports were down 5.4% versus a quarter earlier, with the balance contributing to a 2.2 percentage points of decline to GDP.  The good news for Germany is that the country is beginning to see improvements in exports in key industries. For example, the percentage change in exports of transport equipment and machinery and equipment orders are declining sequentially over the last months, bending the curve in a positive direction. These few data points do not confirm a positive trend, yet are optimistic on the margin. Additionally Eurostat posted March industrial orders for the Eurozone today and German orders improved 3.3% M/M and declined at a lesser rate on a year-over-year basis, down 28.3%, marking another sign of marginal improvement.   

With PPI down 1.4% in April on a monthly basis and down 2.7% on a yearly basis, producers are incrementally benefitting from the reduced cost of raw materials.  The bulk of decline was attributed to fuel, down 18% Y/Y, and heating oil that declined 40% Y/Y; yet any savings that the producer can pass on to the consumer will benefit the domestic "health" of the economy.  Today the statistics office reported that CPI in May likely fell on a monthly basis in 4 of the 6 German states surveyed, with food prices falling between 0.2% and 1.0% on a monthly basis and between 0.4% and 2.1% on a year earlier.  Finally, a recent report by the office showed consumer spending rose 0.5% in the Q1 on a quarterly basis, even as households' disposable income declined 0.9%. All of this signals that consumer confidence may be rising as the cost of goods and services backs off.

A headwind for German exports continues to be the Euro. Despite substantial interest rate cuts by the ECB in the last months, leveling the rate to 1.0%, the Euro has appreciated due to the decimation of the US dollar. This morning the Euro was trading as high as $1.40. For Germany, getting past the lack of global demand will be trying.

Unemployment remains a major theme in Germany, and though a lagging indicator, may be a driving force in overall sentiment. Limiting unemployment, which stands at 8.3%, has been a central issue for Chancellor Merkel and the other parties vying for the head seat in government as elections approach in September.  Pressing for Merkel and Co. continues to be the selection of a buyer for GM's Opel unit in Germany, a decision which should come this week and includes bids from Italy's Fiat, Canadian car-parts maker Magna International, and RHJ International SA. In the balance hang thousands of jobs; her decision may very well favor an owner that can save the most jobs.

We believe Germany will have a larger upside than many of its European peers in the months ahead, especially as global economies melt up. We've been in and out of Germany on the long side via the etf EWG this year. We currently like the technical set-up and will be looking to take a position at the right entry point.  

Matthew Hedrick


Germany Grinding It Out - ger12