Sequential Improvement for Europe’s Workhorse

German Factory Orders and Industrial Output Improve

If you've been following our work you'll know we have a bullish bias on countries with economic leverage and a bearish stance on countries with financial leverage. As it relates to Europe we've seen a number of countries that have underperformed due to the latter, including (but not limited to) Switzerland, the UK, Spain, and Italy in 2009; and we expect this trend to continue well into next year-with budget deficit rising, access to credit should tighten, which will be prohibitive to growth.

Conversely, Germany occupies a spot on a small list of European countries we're incrementally bullish on. The DAX has yet to show signs of real positive returns this year, currently hovering at -3% YTD, yet German Chancellor Angela Merkel and her economic team have shown strong leadership in adequately stimulating the economy while not overextending debt levels. This should be a huge benefit on the TAIL to growth. Approval of her management is confirmed by the most recent Forsa poll that places support for her party, the CDU, at 37%, up one point from the previous week's reading and increasing her party's spread over its rival, the Social Democrats, to 16 percentage points. 

Fundamentally we're starting to see signs that economy is bottoming out. As a leading economic indicator German factory orders increased 4.4% in May on a monthly basis, as reported yesterday by the Economy Ministry in Berlin. The reading was the biggest gain since June 2007 and nine times the 0.5% increase forecasted by surveyed economists. Today the Ministry reported that industrial production rose 3.7% from April; you'll notice from the chart below that industrial production on a year-over-year comparison is bottoming out and showing signs of positive momentum.

The improvement can be attributed in part to the stimulus from the eco premium for scrapped cars, which has been so popular it's oversubscribed, and the income-enhancing measures of the stimulus package, including:  cuts in income tax and increases in child benefits. As these benefits work through the system we expect consumer spending to improve. Already we've seen sequential improvement in forward-looking consumer, business, and investor confidence.

Exports still look battered on a year-over-year comparison (May data is out tomorrow), yet the increase in factory orders is decidedly bullish if the trend can continue. The report showed that demand from outside the Eurozone gained 8.2% and domestic demand improved 3.9%. With the Ministry revising April's reading to an increase of 0.1% from unchanged, factory orders have increased over the last three months.

Exports, which make up nearly half of total German GDP, could remain a stumbling block in the near term as global demand is still depressed, yet we believe that Germany's significant industrial capacity gives it a structural advantage over its European peers moving into 2010.

Matthew Hedrick


Sequential Improvement for Europe’s Workhorse - GermanyIndust

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