The German Economy in December 2018 – Recession, anybody?

First of all, I wish all of you a Happy New Year and hope that you had a Merry Christmas with some time to lay back and relax after a year of relentless growth in Germany. The new year, though, does not paint a too glossy picture: Not all figures are in, but it seems that the economy stopped growing at the end of 2018. Also the sentiment-indicators are now facing south in sync and for months in a row and the DAX has reached „bear-territory“ at the end of the year. 

Although there is no current hard data available yet, the further decline in industrial output indicates that Germany’s GDP, after already shrinking by -0.2% in the third quarter of 2018, has entered a „technical recession“ in the fourth quarter of 2018 (cf. here and here). That would indeed be rather a shock. So let’s wait for the data…

The German DAX rather crashed in December: After closing at 11,257 on 30 November it lost another 876 (!) points and closed at 10,381 points on 28 December 2018 (here). Hence, the DAX , which started at 12,978 points on 2 January and reached its yearly high with 13,559 points already on 22 January, lost 2,597 points over the year or 3,178 points from peak to year-end. Hence, although nearly never mentioned in the German media – the DAX is thus deeply in bearish territory, having lost more than 23% of its value from peak to through!

German exports, seem to become „volatile“, too: after gaining more than nine (9!) per cent in two months (July 2018: +7.6%; August 2018: +2.2% (all YoY)), lost -1.2% in September but regained their footing with +8.5% in October 2018 (all YoY). Now in November 2018, exports remained steady in a YoY-comparision, but declined by -0.4% on a monthly basis. Despite the possibility of statistical glitches, this decline might indicate a new trend. The German Target 2 balance, increased by another Euro 25bn and are now stated at Euro 966 Billion on 31 December 2018.

Germany’s industrial production, which, after registering a small growth of +0.2% (MoM, +0.8% YoY) in September, again pursued its declining path since June ((-0.9% in June, -1.1% in July and -0.3% in August, -0.5% in October (all MoM)) with a swooping -1.9% (MoM) and an even more staggering -4.7% (YoY) in November 2018. At first sight, this decline is rather astonishing, since orders seem to keep piling up – when you look at the monthly development only: German industrial orders, after rising by 2.0% (MoM) in August and +0.3% (MoM; but declining by 2.2% YoY) in September, gained another (revised higher) +0.6% in October 2018 (MoM; however losing –2.7% YoY). So, in a yearly comparison, orders are already declining – which would also explain at least in part the losing trend in production.

German unemployment-rate slightly increased from 4.8% in November to 4.9% in December 2018, but fell another incredibly 175,000 on a YoY comparison, which is another record set since 1992. German inflation-rate, after declining to 2.3% in November further declined to 1.7% in December 2018 (all YoY); however, for the full year, the inflation rate reached 1.9%.

Also, The leading German sentiment indicators remain bearish for December 2018: While the German (Industrial) Purchasing Managers‘ Index (PMI) further decreased from 51.8 points in early December 2018 to 51.5 points in early January 2019, the Ifo business climate index, continued its decline for the fourth month in a row, from 102.0 points in November to 101 points in December 2018. Also, the ZEW Indicator continued its decrease with another 13 points from 58.2 points in November to 45.3 points in December 2018. To cite the ZEW: „While the economic expectations at the end of 2017 were still heading towards a further upswing, an economic sentiment has spread over the course of this year, as it occurs shortly before a recession.“

To sum up: the leading economic indicators – stock exchange (DAX) and sentiment indicators – are now pointing to a recession (in this sense also Wolf of Wolfstreet (here)), while lagging indicators still show a healthy economy. One can only hope that our politicians read the signs on the wall and prepare for the coming calamities – as far as the still can after a spending spree in the social sector rarly seen in history. „Legacy costs“ will be a term not limited to the pension obligations of various old economy companies, especially automakers, in Germany. Also public funded pensions – and the price tag related to it – will (too late!) become a subject of wide discussions, I am sure.

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