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Text of the page (random words):
ia the german export machine well ok german manufacturing industry is slowing but that s only one part of german activity surely the rest of the economy will have sufficient momentum to keep moving forward we this is where i bring in what i consider to be my killer app which is the fact that germany has an export dependent economy in germany movements in gdp follow movements in the rate of expansion of exports let s not get into why that is for the moment think germany s particular demography and just consider the possibility despite all the talk over the years of germany finally decoupling that it can t export dependence could well be the key explantaion for why the performance of the german economy is so extreme and so volatile with quarters of record growth being witnessed just before the onset of substantial recessions recessions which often register record falls in output only to be followed by massive recoveries the reality is not that germany is either a growth or a contraction champion but that export dependency simply makes the german economy more volatile and more susceptible to sudden changes than those of some of its neighbours like france in fact germany s long term trend growth has been falling steadily we can see the slowdown everywhere except in the ecb rate policy but why do you insist that this won t simply be a slow patch or a soft spot even the bundesbank is saying that german growth in the second half of the year won t be as strong as in the first half well here comes exhibit b the slowdown is global and for an economy which needs growing exports to grow then a global slowdown is a real problem even china that other great export driven economy is feeling the heat with new export orders also having slid into contraction territory and there are more indications than simply the pmi that the economic outlook in germany is deteriorating we have the ifo sentiment index which has now entered overall decline and then there is the latest european confidence index reading naturally none of these readings are definitive but they are what we have at this point since data from june is hardly helpful to tell us what will happen in august which is why we need to rely on the softer forward looking indicators and obviously i can only discern something about the situation such as it is now should ben bernanke as i argued in this post here decide to go ahead with another bout of quantitative easing germany would probably be one of the leading beneficiaries but that is the world we might have and not the one we actually have as of this moment so summing up i cannot do better than tim moore senior economist at markit and author of the pmi report who said in his final comment july s final pmi data confirmed a sharp slowdown in german private sector growth with output levels rising at the weakest pace since the autumn of 2009 the month on month loss of growth momentum was also the steepest since the recovery began two years ago new business gains meanwhile hit a stumbling block in july as heightened economic and financial market uncertainty encouraged clients to delay spending decisions the latest overall rise in new order levels was the slowest since the start of the upturn which in turn is likely to weigh on business confidence and job hiring in the months ahead this post first appeared on my roubini global econmonitor blog don t shoot the messenger posted by edward hugh at 11 29 am no comments wednesday september 1 2010 the odd couple the modern world moves at a breathtaking pace even when most of us find ourselves on holiday no sooner do we receive read and start to digest one set of economic data than we find ourselves pushed to think about what the next set will look like the clearest recent illustration of this undoubted reality is to be found in peculiar twist of events which meant that just as the news reached us that the german economy had expanded at a record rate in the second quarter at almost the very same moment federal reserve officials meeting in washington decided to significantly downgrade their economic outlook for the united states saying the pace of recovery in output and employment had slowed in recent months and was likely to be more modest than anticipated in the near term but this followed a month of may when it seemed europe s economies were on the brink of disaster while over in the united states some sort of recovery was on the cards so what is going on here does the earth switch it s magnetic pole every six months with what went up last time round now going down or could it possibly be some kind of common thread here one common factor which unites the unprecedented expansion we have just seen in germany and the fears of renewed recession in the united states well as it happens indeed there could and it has a name the greek debt crisis structural problems in the currency architecture so what is the link well the fact of the matter is that we live in a bi polar world at least as far as currencies are concerned until our current global financial architecture evolves into something more sophistocated we have two main currencies which rival one another for pride of place in central bank reserves and investment portfolios the euro and the dollar and when one of these goes up the other must come down and vice versa it is as simple and as complicated as that prior to february and the outbreak of the european sovereign debt crisis the us economy was seen as the weaker partner and the euro was priced at a relatively high level then the euro slumped falling at one point from around 135 to 120 to the us dollar in a matter of weeks as attention focused on what appeared to be significant weaknesses in the eurozone infrastructure as a result of the change german exports boomed while the us economic recovery steadily started to grind to a halt and with the rise of the dollar the global economy started to fall back into dangerous pre crisis habits the us trade deficit started to open up again and one exporting nation after another started to see yet one more time the us market as the global economy s consumer of last resort indeed the us june trade statistics reveal the extent to which american consumers are once more sucking in large quantities of imports as their spending power recovers while weak demand in the rest of the world coupled with the comparatively high dollar has been keeping a brake on american exports as the new york times put it in an editorial china is mopping up demand everywhere you look with its artificially cheap supply of goods while germany the world s other exporting power is cutting its budget and relying on foreign demand to drive its economic rebound this isn t sustainable and the numbers prove the point the united states trade deficit ballooned to 49 9 billion in june the biggest since october 2008 in july one month later china recorded a 28 7 billion trade surplus the biggest since january 2009 in the first five months of the year germany s trade surplus driven in large part by demand for machine tools in recovering asian economies many of them busily sending exports to the us rose 30 percent compared with 2009 and this impression is only confirmed when we come to look at the latest revision for us gdp in the second quarter according to the revised data us gdp increased at an annualised 1 6 rate as compared with the 9 annual rate in germany after registering a 3 7 rate in the first quarter according to the bureau of economic analysis bea today the second quarter growth rate was revised down by 0 8 percentage point from the advance estimate of 2 4 in part as a result of the new data on imports for june the us bureau of economic analysis report stated that slower gdp growth primarily reflected a surge in imports compared with the previous quarter and a slowdown in inventory investment in fact real exports of goods and services increased at a 9 1 rate in the second quarter compared with an increase of 11 4 in the first while real imports of goods and services increased by 32 4 compared with an increase of 11 2 in q1 effectively the american economy is simply too weak to carry this additional load and is now showing signs of heading back towards recession forcing the federal reserve which only a few months ago was moving towards a tightening in monetary policy to fend off inflation to now re assert its policy of quantitative easing to avoid any posssibility of a drift towards deflation meanwhile the german economy turns in a 2 2 per cent quarterly growth spurt unified germany s best ever performance the annualised 9 per cent growth rate is as the financial times noted virtually unprecedented in developed economy terms such dramatic changes rather than reassuring us that all is well only lead to even more doubts is it really desireable for an economy to shoot forward so dramatically only to fall back again in the second half which is what almost everyone monsieur trichet included expects to happen not only does the german performance seem exaggeratedly large at the other end on europe s periphery the result was lamentably small greece naturally exceeded everyone s expectations on the downside with a 1 5 per cent quarterly contraction a 6 per cent annual rate but spain remained at the bottom end of the range with a 0 2 per cent expansion as did portugal undoubtedly the greek contraction will slow as the year advances but the outlook there continues to be preoccupying only today the greek manufacturing pmi which showed the contraction in greece s industrial sector accelerated again in august has reminded us of just how difficult it is going to be for the country to return to growth and especially if the external environment now starts to deteriorate as the ft s david oakley said yesterday in many ways germany could be said to have had a good crisis since the greek issue pushed the euro down and german exports up while the current flight to safety is driving down the yield on german bunds to record lows even as it pushes up the spreads for peripheral europe sovereigns among other imapcts this gives german companies an even greater competitive advantage as their capital costs come down even while those for their competitors go up spreads which are the additional borrowing premiums countries have to pay over benchmark bunds hit a fresh record of 357 basis points in ireland this week following problems in allied irish bank and a standard poor s downgrade in portugal and spain spreads have been creeping back up and are now once more close to their all time highs spain s 10 year bonds are trading at about 192 basis points above germany compared with 57 at the start of the year while portugal is trading at 333 basis points compared with 67 on january 1 the following chart shows how peripheral spreads have evolved since the start of the year they have been indexed to 1st january as is evident they shot up in may then came down to lower levels in july but during august they have once more been climbing all three economies are experiencing extremely weak growth and ireland is even flirting with deflation higher government borrowing costs can harm economies in a number of ways from higher borrowing costs for companies to added pressure on a country s public finances as more is eaten up in interest charges leaving less for public services and stimulus effectively the presence of a large spread differential means that monetary policy is applied unevenly across the euro area despite the one size for all objective of the ecb and doubly so with a credit crunch which means some banks struggle to finance as a backdrop japan trapped on the ropes and as if all of this wasn t enough germany s main competitor in asia where german exports have been clocking up large increases has been effectively ko d by the flight to safety produced by the sovereign debt crisis japan s exchange rate against the usd dollar is now hovering around a 15 year high the consequence of this is not hard to predict while germany clocks up record exports to china and other parts of the continent the japanese recovery is gradually grinding to a halt as the latest manufacturing pmi report only confirms we need to seriously address the imbalances at the end of the day it is hard to avoid the conclusion that we continue to live in a very unbalanced and essentially economically unstable world where currency valuations and economic growth rates fluctuate with unnerving rapidity not only that the recent federal reserve meeting seems to have constituted some sort of defining moment the point when everyone finally recognises that the long promised recovery was no longer simply weeks or months away and that emerging from the trough in which the developed economies find themselves is going to involve a long period of slow and painful effort one where we will also need time to clean up the mess we have made in cleaning up the original mess assuming that is that we have the dynamism and energy to do so on thing is clear the old habits won t work any better now than they did before 2007 and external deficits which were not sustainable then will not be sustainable now so we need a new model a model in which the emerging markets will have a much larger role to play than ever before and if we are to move towards a more sustainable future then we need to move beyond those simplistic headlines stressing the virile nature of germany s export prowess there is no doubting the efficacy and competitiveness of many german companies but for that very reason that country needs to shoulder more of the responsibility for sharing the burden which is involved in finding solutions here in europe we don t only need sacrifices in the south some of them also need to be made in the north german industry is enjoying real and tangible benefits via artificially low interest rates and an undervalued currency from the mess that the greeks created for themselves but in the interest of all european some of those benefits need to be plowed back in again since if greece is allowed to fail no one will be the winner looking beyond europe we need to think about how to best aid and abet the emerging economies in their quest for growth and better living standards earlier in the crisis i asked nobel economist paul krugman a question which is very much to the point at a time when the financial crisis is generalised across all developed economies whether because those who borrowed the money now have difficulty paying back or those who leant it now struggle to recover the money owed them to which new planet are we all going to export my response to him back in january was that maybe we don t need to look so far afield many developing economies badly need cheap and responsible credit lines and access to state of the art technologies so why not accept the world is changing and go for some sort of new marshall plan one capable of generating a win win dynamic which would be in all ou...