Japan joins Germany on the rack – it’s all a part of the adjustment

November 17, 2008 | posted by Michael Baxter in Germany, Japan, Sterling | comments (1) | Print This Post

It’s funny how this has worked.

If this is a crisis created by debt and surging house prices, why is it that the first G7 economies to hit recession are Germany and Japan? Well, there is a good reason, and it is rather the point.

This morning, official data confirmed it, Japan is in recession.

Japan’s second quarter GDP contracted by 0.9 per cent, and by 0.1 per cent in the third quarter.   On an annual basis the economy has now contracted by 0.1 per cent.

You may recall, figures from last week confirmed that Germany is now in recession, too. So that is rather odd.

The UK and US are the two countries that are supposed to be suffering the most from the crisis of debt and crashing house prices – and yet it’s Japan and Germany that are in recession first. Is this the final triumph of Anglo-Saxon spend now–pay never economics?

The answer is: No.

Germany and Japan have hit the buffers the first, precisely because of their underlying strength.

Japan’s current account surplus is currently running at 3.9 per cent of GDP. In Germany the surplus is 5 per cent of GDP.

In both economies, while we are busy spending, they were busy saving.

But then again, isn’t the whole point of saving, to ensure that you have got money for when times are not so good?

Germany and Japan are both perfectly positioned for a good old Keynesian and monetary boost. Keynes never said governments should spend indefinitely, just in times of crisis. He believed in strong government finance when times were good.

Both economies are well placed to let the consumer take up the slack and spend where exports are slowing.

There are problems with both economies. Both suffer from a total net debt as percentage of GDP which is too high.

But the real scope for recovery comes in the form of their currencies. For years Japan was held back by the weak yen. To a lesser extent, the euro was too weak for Germany, too.

This all helped exports. Twenty per cent of Japan’s exports go to the US; around 15 per cent of Germany’s exports to the UK and US.

And that is why the two economies are now in recession.

 But the cheap yen and euro was lousy for encouraging consumer spending. 

For the UK and US, it is the other way round. No amount of fiscal stimulus and tax cuts can hide the fact that British and American consumers are in too much debt.

The global economy can only recover when the likes of Germany and Japan spend more, import more, and maybe export less, while the likes of the US and UK spend less, import less, and export a lot more.

The order then will be like this.

First, Japan and Germany will recover via their consumers. Then the UK will recover thanks to the low pound boosting exports. For the US, it is tougher. The economy badly needs to see a fall in the dollar. Only then can Uncle Sam recover in a stable way.

This brings us to one more point: fears about sterling. As ever with these things, there is always a danger that things will go too far. The pound may fall too far – and that would be a problem.

Some economists and politicians, especially politicians whose claim to fame is that they stood against John Major for leadership of the Tory party when he was prime minister, have got it wrong. The argument that the recent fall in the pound seen so far is bad for the UK, is completely wrong.

For years the UK’s fundamental weakness was that despite surging imports, sterling remained strong. This encouraged consumer spending. A pre-requisite for the UK to adjust was always going to be a fall in sterling.

The danger for the UK lies in how severe the adjustment is.

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The German recession, it’s the polar opposite of the UK recession

November 13, 2008 | posted by Michael Baxter in Germany | comments (0) | Print This Post

Consider this tale of two countries. Germany and Britain do things differently. In Britain, the consumer reigns supreme. Retail therapy is the most popular pursuit; personal borrowing has risen from around 52 per cent of GDP in 1975 to 171 per cent of GDP in 2007, the highest in the G7. The deficit on the current account is around 2.7 per cent of GDP.

In Germany, by contrast, the onus is on making things. In 1975, personal borrowing was 57 per cent of GDP – higher than in the UK. Yet it has only increased modestly since. By 2007, personal borrowing in Germany was 99 per cent of GDP. Its current account surplus was worth around 5 per cent of GDP.

They are as different as chalk and cheese – and yet the two have something in common. They are both in recession.

In Germany, the economy contracted in the third quarter of this year, after a 0.4 per cent contraction in the second quarter.   It’s the second recession in six years. Germany is also the first of the G7 economies to suffer in this way as a result of the economic crisis.

The UK is not yet officially in recession. Growth was negative in the third quarter, and although just about everyone expects the next quarter to be negative too, it has not happened yet.

And yet Germany has done all the things that people have argued the UK should have done. There was no debt bubble. It was one of the few countries that has not seen a housing boom. Its labour market has been reformed. And it’s less reliant on the indigenous consumer.

The truth is, however, the world is changing. Germany’s second and third largest customers are the US and UK, accounting for almost 15 per cent of all its exports.

As the US and UK shift away from over-reliance on consumers, towards export sectors, Germany must do the opposite. The world is re-aligning. And economies on both sides of the re-alignment are suffering.

That is why the solution to the economic crisis must be international. The world’s great savers must spend more. The world’s great spenders must save more. The economic crisis won’t end until that happens.

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Eurozone contracts in second quarter – it’s official

August 15, 2008 | posted by Michael Baxter in Eurozone, French economy, Germany | comments (0) | Print This Post

At first glance it all seems rather alarming. The Eurozone was supposed to take up the fiery torch of economic growth, and run with it before once again setting the UK and US economies alight, this time with an export based recovery. At first this seemed to be happening, with a string of positive economic stories emerging earlier this year from the region – especially from Germany. But now, it is as if the one thing the Chinese dreaded the most as their Olympic torch travelled the world has happened, and the fire has gone out.

In the second quarter of this year the economies of Germany, France, Italy and Ireland all contracted. Spain managed to avoid contraction – but more and more are now predicting recession is imminent for the Spanish economy.

This was not supposed to happen. Sure, the Irish and Spanish economies suffered from an unsustainable housing boom and debt bubble, but most of the region was a paragon of prudent export and investment led growth. It had been a similar story in Japan, by the way. Savings are up, consumer spending modest, yet the economy of the Rising Sun has also suffered a contraction in GDP during the second quarter.

So how has it happened? Well in answering that question, we can at last reveal some good news.

Okay, Italy is a basket case. It seems likely the Italian economy will continue to lurch from one crisis to the next for the foreseeable future. Ireland and Spain are very Anglo Saxon in their economic challenges – both economies seem set to see a nasty fall in house prices which will spill over to the economy at large.

But closer examination of the big two, France and Germany, reveals a more promising story.

In the case of Germany, it appears growth was too high in the previous quarter – and we have just seen a reaction to this. Q1 saw the economy expand by a very impressive 1.3 per cent. The second quarter, on the other hand, contracted by 0.5 per cent, but remember this is quarter-on-quarter data. Combine the two quarters, then overall the growth rate was pretty respectable.

But the Eurozone suffered from an additional problem, and it was this that caused such turmoil in France. The Eurozone is struggling because the cost of living is rising fast. It seems the high cost of oil and food is really taking its toll on many Eurozone economies. At the same time, the European Central Bank (ECB) is the most hawk-like of all the world’s major central bankers. While the Fed has slashed rates, and the Bank of England has made soft noises about interest rates, the ECB and its president Jean-Claude Trichet have been swooping over the interest rates landscape like a hawk planning a feast of doves for its ravenous family.

It is true that, in addition to Ireland and Spain, house prices are too high in many Eurozone economies. Capital Economics recently predicted French house prices would fall by 10 per cent, but then again, the UK, Spain, Ireland and the US would love it if the prognosis for their own markets were that good.

Some have argued that the recent news of the Eurozone contraction is proof its central bank misread the situation, and that it should have taken a leaf out of the Fed’s book, and slashed rates.  But that is only true if you take a short-term view.

Surely the ECB, by focusing on inflation, is getting the pain over with more quickly. The recovery should be all the more rapid, as a result.

If you consider the reasons for the Eurozone slowdown, then it seems reasonable to assume that if oil and other commodity prices fall, then the economy will soon pick up. As was argued above, there are very good reasons for believing oil will fall. Food, too, is showing signs of dropping off.

But, even if commodity prices don’t fall, but instead merely stop rising, then because the ECB has been so tough with interest rates, it seems Eurozone inflation will go into reverse much sooner than in the US and UK; as a result, Eurozone interest rates will then be able to fall more rapidly.

And that is where the potential recovery can come from in the US and UK. Well, at least partially anyway. China, India, and Japan and the rest of Asia will play their part too. For Japan, the story is much the same as Europe. Just like Europe there are good reasons to believe the contraction will be short-lived. As for China, well it was told here earlier this week that there is strong evidence to suggest China is consuming more and importing more.

But there is a fly in the ointment. It often feels as if many economists have underestimated how serious the problems in the US and UK are.

The fact is, the US and UK are Germany’s second and third biggest customers. The US is Japan’s biggest customer. For France, neither the UK nor US are so important, but there must surely be a question mark on the prospects of a Eurozone recovery if these two big consumers of the world’s products hit the buffers.

It is now time to turn our attention to the two big economic developments yesterday which hit the two big Anglo Saxon economies.

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Markets soar, as news on economy dives

August 6, 2008 | posted by Michael Baxter in Germany, Markets, UK economy, US economy | comments (0) | Print This Post

Markets had another day of celebrating yesterday – although when you drill down and examine the reason why, it does seem a tad daft.

The Dow Jones soared 331 points, one of its best days of the year. The FTSE 100 rose a healthy 134 points, the German DAX index was up 168 points.

But the news in the US, UK and Germany was hardly the stuff booms are made of. In fact, you could say all three economies saw a catalogue of woes yesterday.

In the US two pieces of news got Wall Street excited. First off, there was the falling price of oil. It was down yet another $2 yesterday and is now around $27 off the all-time high set in July.

But now consider why oil is falling in price. It is down because dealers are concluding that the US economic slowdown will be worse than originally expected, and because there is growing evidence that the combination of high oil and slowing US is hitting Asia’s economies too.

In other words, bad news is forcing the price of oil down, therefore equity markets have celebrated. Actually it is good news oil is down, but it’s not surprising. Of course a slowing US economy will lead to less demand for oil, will lead to a lower oil price. It’s forces like that, that create the economic cycle. But it’s hardly the stuff to justify a big boost to shares.

The other big piece of news from the US was also mixed at best. The Fed chose to leave interest rates alone. Well, no one expected rates to change in the first place. No, what got markets so happy was what the Fed said.

But read this: “Tight credit conditions, the ongoing housing contraction and elevated energy prices are likely to weigh on economic growth over the next few quarters,” said the Fed.

As for inflation, it said that this has “been high and some indicators of inflation expectations have been elevated.”

So why did markets celebrate? Well, for one thing, the Fed stopped talking about “continued increases” in energy prices, and merely said they were “elevated.” As for growth. Last time, the Fed said the downside risks to growth “appear to have diminished somewhat.” This time it merely said “the downside risks to growth remain.”

Ummm, so the prognosis for growth is no worse than a month ago. See what we mean about an overreaction from the markets?

As for the UK, two major indices were published yesterday, and neither gave much room for optimism.

You will recall from the other days, the Purchasing Managers Index from the Chartered Institute of Purchasing Supply (CIOS) has fallen deep into negative contraction territory. As you know, the short-term prognosis for the UK construction industry is just hopeless at the moment. So that leaves the consumer, and service.

Yesterday saw the release of the CIPS index for services. Well, if you squint your eyes the news may seem good. Its headline index for services rose slightly from 46.1 in July, to 47.4 in June. But the June reading was simply awful, and was a full ten points down on the score seen a year earlier. So the tiny rise in the index seen over the last month, really is small consolation for the fact that this index is well into recession territory.

Finally, there is consumer confidence. The Nationwide consumer confidence index fell again in July, to just 51. This is ten points down on the June score, but the point is the June score itself was considered to be dreadful. The Nationwide index has only been going since 2004, so one can’t make meaningful comparisons with previous slowdowns. All we can say with certainty is that the latest index reading is by far the worst reported by the building society, and almost half of the level seen a year ago.

A recent comment on our blog asked what is there left for us to do: “Farming. Begging?”

It is certainly true that the UK is under pressure on just about all fronts at the moment – with the exception of the two sectors above. The slowdown will come to an end eventually, of course it will. No doubt the falling demand across the world will lead to big falls in oil and other commodities, until they seem cheap again, and the next boom can begin. But, for the time being, the UK is clearly on the ropes.

With the pound so low, maybe our best bet is to export ourselves out of trouble. The snag here is that the US is our biggest export market, making up around 14 per cent of our exports. So there is not much hope of recovery coming from selling to our main customer.

Out second biggest export market is Germany. So thank goodness for the Germans, and their economic strength.

It is just that the German economy contracted in the last quarter. Or so says a report in the German newspaper Süddeutsche Zeitung. In fact, the economy contracted by no less than a full percentage point, said the paper.

Okay, the previous quarter for Germany was a real humdinger, so all we really saw was a slight balancing of the scales. And by the way, the official data is not out for another week.

But, news like that does make it hard to understand yesterday’s surge on the DAX index.

All we can conclude is that the markets are only a slight guide to what is going on. But sometimes it feels as if you should take a contrarian view, and say the better the markets perform, the worse the economic news must be.

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Eurozone crawls to near standstill too, but at least the French put in the extra hours

July 25, 2008 | posted by Michael Baxter in Eurozone, French economy, Germany | comments (0) | Print This Post

And now to cap it all, Europe is in a mess again. But, at least headless Nick Sarkozy is getting something right.

Earlier this week Spain’s finance minister Pedro Solbes cut growth forecasts from 2.3 to 1.6 per cent for 2008. But with Spanish house prices falling even faster than its banks can buy up British banks, with Spain’s economy far more reliant on construction than most other economies, it seems likely this is just one of many cuts in forecasts to follow.

Meanwhile, the Eurozone PMI indices for manufacturing and services are now both getting into danger territory, with both below the critical 50 no-change mark for two months in a row. The manufacturing index dropped from 49.2 points in June to 47.5 in July and the services index 49.1 to 48.3.

The French composite PMI index now stands at a level which implies GDP will fall by 0.4 per cent. The German index is faring better, and is suggesting 0.2 per cent growth for Germany.

Meanwhile, the German ifo index reflects the business climate has been falling fast lately too. Both the ifo expectations and current conditions indices are at their lowest levels since the autumn of 2005, although it is worth pointing out the index has had something of a golden patch during this period, and is still above the historical trend.

But, in France, parliament has finally passed a law to scrap their 35-hour working week. This was of course one of the key reforms Mr Sarkozy has been gunning for.

It is a curious thing, but French productivity per hour is extraordinarily high. One possible explanation for this is that many French workers are understating how many hours they work. They know they can’t get their work done in 35 hours, so they are just putting in the extra time and not declaring it.

In the UK, the winner of the TV show the Apprentice won despite being caught out lying on his CV, and embellishing the truth. In France it appears they lie through understating the truth.

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Germany stages jobs boost, while Uncle Sam drops pleasant suprise

June 2, 2008 | posted by Michael Baxter in Germany, US economy | comments (0) | Print This Post

Talking of recoveries.

You may have noticed it has become fashionable to talk Germany up again.

The day when economic booms were made of consumer borrowing may be replaced by a time when it is making things that counts.

If this is right, then Germany is sitting pretty.

House prices in Germany have barely flickered in years, meanwhile all the other indicators have been looking good.  Government spending has been falling – it is now lower than the UK’s as a percentage of GDP, the cost of re-unification has more or less been paid off, but what about that inflexible job market we used to hear about?

The latest data really is something to make you say Ja.

Germany’s unemployment has fallen below 8 per cent for the first time in 16 years.

The trouble is, of course, will it still be able to sell things abroad when the likes of the US, UK and now apparently, thanks to rising inflation, the rest, are struggling so?

9.6 per cent of Germany’s exports last year were to France, Italy bought 6.7 per cent of Germany’s sales abroad, the Netherlands 6.2 per cent.

The trouble is, lurking there between France and Italy are the US and UK – 8.5 and 7.2 per cent of exports respectively.

But maybe there is a glimmer of hope from the US too.

Latest data says that the US did not grow quite as slowly as originally thought.   Apparently, the US expanded by an annualised rate of 0.9 per cent between January and March, not 0.6 per cent as originally thought.

Most economists think the second quarter will be worse, but really the key will lie with Q3.

The general consensus is for the economy to stage a comeback, in which case Uncle Sam will have avoided recession after all.

Then again, the general consensus has been too optimistic in the past. 

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Japan and Germany strike back with stunning performance

May 16, 2008 | posted by Michael Baxter in Eurozone, French economy, Germany, Japan | comments (0) | Print This Post

When the US sneezes the rest of the world catches a cold, or so they used to say.     More recently, the talk is that we have seen de-coupling, that the US is no longer so important.  It’s an important point, because if the de-couplers are right, global recession will be avoided, and there is scope for the US and little old UK to export their way out of trouble.  If they are wrong, however, then the global economy is about to get a double helping of influenza.

The last 24 hours have seen news break from Germany, Japan and France, and it’s dramatic indeed – and just for once the unfolding drama has a high feel-good factor.

In the first quarter of this year, Japan grew by a very impressive 0.8 per cent – not bad for an economy which is supposed to be in recession.   Earlier this year both Goldman Sachs and Morgan Stanley said Japan was either in, or about to hit, recession.  As for the government, well, unlike a certain government you and I are familiar with, rather than talk things up, Japan’s official estimates said the economy was at a standstill.    They were wrong, and isn’t nice to see the error on the down side?

But Japan’s performance was just for starters, the real meat was supplied by Germany.  For in the one of the few developed countries in the world where making things is still considered to be the way forward, quarterly growth was a stunning 1.5 per cent.  Let’s reiterate that – 1.5 per cent in just three months.  You would have to rewind the clock back 12 years to find the last time it expanded so fast.

Even in France, which itself was supposed to be growing at a pace which was barely above zero, growth came in at 0.6 per cent – impressive by normal standards, although rather tame in comparison to its bigger neighbour.

The Eurozone as a whole managed 0.7 per cent, and there is even talk that Italy – Europe’s basket case, expanded in the quarter – although the official data is not out yet.

As was reported here yesterday, Spain’s growth slowed quite rapidly, and with the country’s housing market on the ropes – if not on the canvas, Spain is set for a tough period. 

But let’s not  spoil the good news with dark thoughts about Spain.    The fact is that the economic performance seen in Germany and France vindicates the European Central Bank’s tough stance on inflation – but at the same times illustrates perfectly the problem with the euro – because Spain desperately needs rate cuts.

A break down for the Eurozone figures is not yet available, but according to the FT both investment and consumer spending in Germany rose significantly. 

France and Germany are Britain’s second and third biggest export markets, respectively.  Between them they account for 23 per cent of our exports, so a sharp re-bound in these two countries will help offset falls in the US, which makes up 13.1 per cent of our exports  Unfortunately, our fourth biggest export market is Ireland, which also is struggling under falling house prices.  (As an aside, it’s quite amazing, isn’t it, that in this globalised world, a country like Britain, with its free trade policy, finds its fourth biggest export market is Ireland, with a population of just 4.3 million.)

In Japan, domestic demand added 0.3 percentage points to the quarterly growth – that may not sound much, but for the economy of the Rising Sun that is pretty good.  Consumer spending jumped by an impressive 0.8 per cent.

Japan’s growth was also helped by surging exports – which isn’t quite so good for the rest of us.  Right now, we need Japan to import more – after all, last year her current account surplus was around $200bn, or around 6 per cent of GDP.

So, is there a grey cloud to this silver lining?     What Germany and Japan both have in common is that they are both big exporters.  A question mark still remains over whether these two economies can continue to expand as the US consumer pulls back. 

Last year, US imports were worth $1.8 trillion, that is to say, US consumers bought $1.8 trillion worth of foreign goods.  It will take time for a US slowdown to show up in German and Japanese trade figures.

The latest economic news, then, is very promising, but we need the consumers from these two countries to spend more.    We need these people to adopt something of an Anglo-Saxon approach to spending now, and worrying about it later.  Whether, however, that is in their interests, is another matter altogether.

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Germany gives out nice surprises

March 28, 2008 | posted by Michael Baxter in Germany | comments (0) | Print This Post

The trouble for the UK is that its main source of exports is the US – accounting for 13.1 per cent of our exports.  Next on the list is France – oh dear, Mr Sarkozy may love us, but it is difficult to love France’s economy.     In third place is Germany, accounting for 11.2 per cent of our exports.  Ireland, another country with a troubled economy is our fourth main export market, and the Netherlands fifth.   It is quite interesting, isn’t it? We supposedly live in a global village and yet three of our closest neighbours, France, Ireland and Holland, are still among our key export markets.

But of that list, the real focus of attention should be Germany.    In fact we import more from Germany than any other country – if only she could get moving then maybe the UK could up its exports.

Here at last there is some good news.    Earlier this week, Germany’s IFO index was out, and it was good.

The index for tracking the Business Climate hit 10.4.8 in March.  Although it did slightly better than that last year and the year before, 2007 and 2006 aside, the index is now at its highest level since 1993.

In January, industrial production rose sharply too, and construction has positively surged.

At the end of last year, it is thought Germany’s net public debt fell to around 64.5 per cent of GDP, a little higher than in the US, but a lot smaller than the level currently seen in Italy and Japan. But the point is, year on year, Germany is now turning out surpluses.  The National Institute of Economic and Social Research believes Germany’s public debt will fall to  52.1 per cent of GDP by the end of 2009. 

In other words, the cost of re-unification has all but been paid for.

It seems unlikely Germany will enjoy the kind of growth seen in the US in recent years, but most forecasts are predicting growth of between 2 and 3 per cent over the next five years.

Germany’s problem is that the US is its second-most popular destination for exports, and the UK the third-most popular destination.    So a slowdown in the US, and then here, could hit Germany down the line.

What we need is for Germans to start discovering the joys of retail therapy.    If consumers were to start borrowing more, then Germany could pull through a slowdown in its main export markets – and if the euro continues to rise, maybe some of those consumers will buy British. 
 

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