The economy of Germany is seeing something of a depression

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via notayesmanseconomics

Some mornings the economic news sets something of its own agenda and today has been an example of that since this was released earlier.

HCOB Flash Germany Manufacturing PMI Output Index(4) at 42.1 (Jan: 45.7). 4-month low.

That provided quite a bit of food for thought as we had come into 2024 thinking that things were improving as for example natural gas prices have been falling.For example it reinforces my article on Monday about German deindustrialisation. Also it is the stated position of the ECB that “things can only get better” to quote D’Ream.

However, some forward-looking survey indicators point to a pick-up in the year ahead.

That was from the 15th of this month at the European Parliament where Christine Lagarde repeated almost word for word what she had said at the policy press conference at the end of last month. Indeed back at the press conference she went further.

I don’t know exactly what PMI numbers you’re referring to because the most recent PMI numbers are actually a little indication that things are coming in place for recovery in 2024. So if you have other PMI numbers that I’m not aware of, then let me know. But you know, when I look at the composite PMI output, it’s higher than it was the month before. If I look at PMI future output, it’s north of 50. So maybe you have better information

There was something of a swerve in the second last sentence because even if a PMI is higher than last time if it is below 50 it shows another contraction, just one at a slower rate. Indeed this morning’s update for Germany is the weakest of this phase.

The headline HCOB Flash Germany Composite PMI Output Index registered below the 50.0 no-change threshold for the
eighth month in a row in February. At 46.1, down from January’s 47.0, its latest reading indicated the fastest rate of contraction since October last year.

As the German economy shrank by 0.3% at the end of 2023 then such a number suggests more of the same and perhaps worse. Regular readers will know I take these numbers as a broad brush lacking precision but they will also know that the ECB has more faith in them. Indeed President Lagarde illustrated that by the detail she identified above. In fact it was not only manufacturing which weakened.

The decline in manufacturing production reaccelerated midway through the opening quarter, with the
respective seasonally adjusted output index retreating sharply from January’s eight-month high of 45.7 to 42.1. Business activity also fell in the service sector, although the rate of contraction was only modest and slowed from the previous month (index at 48.2).

In fact her argument that things will get better had trouble with this part of the update.

As was the case with output, new business in the German private sector declined at the quickest pace for four months in February. Reports from surveyed firms highlighted general reluctance among customers amid economic uncertainty and tight financial conditions. New orders fell across both monitored sectors, but particularly sharply in manufacturing where the rate of contraction accelerated markedly from the previous month to the fastest since last November. There was a further broad-based
decrease in new export business.

As you can see it seems unlikely that there will be much of a change in the first quarter and into the start of the second one. Presumably President Lagarde will now be pointing to this.

Driven by a further strengthening of service sector optimism, overall business expectations improved to a ten-month high in February. The result did, however, mask a deterioration in manufacturing sentiment, which turned pessimistic for the first time since last November and kept overall business confidence still below its long-run trend.

The fundamental problem with this is that the ECB has just experienced a catastrophic failure via insisting that inflation expectations were a better guide than rising inflation and as Kelis put it.

Might trick me onceI won’t let you trick me twiceMight trick me onceI won’t let you trick me twice, no

Indeed the release does address the optimism issue directly.

“Looking ahead to 2024, the outlook for the German economy isn’t exactly bright. Although the HCOB Flash Composite
PMI’s expectations for future output are still above 50, they’re significantly lower than its long-term average.”

German Bundesbank

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We can look at the situation via Monday’s monthly report from the Bundesbank which told us this.

Some headwinds will probably persist into early 2024 as well and economic output may decline again somewhat in the first quarter.

Having told us this then that means a recession.

German economic output contracted in the final quarter of 2023, according to the February Monthly Report.

But then apparently not according to them.

While this would mean the ongoing period of weakness in the German economy following the start of the Russian war of aggression against Ukraine would continue, there is still no evidence of a recession in the sense of a persistent, broad-based and distinct drop in economic output and no such recession is expected either, the economists write.

That makes them look to be in denial because if GDP went -0.1% and then -0.1% maybe you could argue it is marginal. But -0.3% and then as we stand looking at something that may well be similar that is much more clear cut.

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Moving onto the detail they too had concerns about manufacturing.

Order intake has been weak for some time now, and is likely to be a notable factor increasingly impacting on industrial output. Surveys by the ifo Institute show that the share of manufacturing firms reporting a shortage of orders has risen steadily since April 2023, reaching 37% at the end of the period under review.

So an industrial revival looks to be some way off and then they blame themselves for it.

In addition, investment was dampened by higher financing costs and the end of the environmental bonus. Higher interest rates and unfavourable weather conditions featuring high levels of precipitation also weighed on construction output and construction investment.


We have a new type of reality here. Those who have followed the Euro area since its start will know of the argument that ECB monetary policy was set for Germany. That meant that some suffered and contributed to the Euro area crisis in the early part of the last decade as the Greek economy and the housing markets of Spain and Ireland saw boom and then bust. Now monetary policy with an interest-rate of 4% is nit being set for Germany which may be in something of a depressionary period or as the Bundesbank puts it.

 Fourth-quarter real gross domestic product (GDP) fell by a seasonally adjusted 0.3% on the quarter according to the Federal Statistical Office’s flash estimate, after virtually stagnating in the first three quarters of 2023.

So Germany on a stand alone basis would be looking for interest-rate cuts and that is before we get to issues like the problems of some of its banks in the commercial property arena.

Contagion to the Aareal Bank in Germany is spreading
Still surprised that this is not getting more attention outside of Germany ( @AndreasSteno)
So we now seem to have ECB interest-rates set for the rest of the Euro area rather than Germany which is quite a change. Also the ECB has its own issues at the moment.
After years of profits, in 2023 we posted a loss of €1.3 billion due to interest rate rises needed to combat inflation. Our mandate is to maintain price stability, not to make profits. We can effectively operate and fulfil our mandate regardless of losses.


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