Why you shouldn't get too excited about the 1.2% increase in German industrial production: ECB + global slowdown
Thursday, July 7, 2011
Yesterday, I illustrated (and rather convincingly, in my view) that German factory orders are more of a harbinger of bad economic things to come rather than a strong report to get 'excited' about. Well, today I illustrate why you shouldn't get too excited about the 1.2% rise in working-day and seasonally adjusted German industrial activity in the month of May, as reported by the German Federal Statistical Agency.
Case 1: Industrial activity is set to slow, as illustrated by recent PMI trends.
The chart above illustrates the cyclical component of Industrial Production, filtered using the HP Filter (see reference at end of post), and the previous month's PMI survey. The correlation is 64%, so there's a clear signal from the PMI that stabilization of the cyclical IP is afoot. Better put: the trajectory of cyclical industrial activity is going to plateau.
So while IP remains robust, German industrial activity is unlikely to push Euro area GDP growth up and up for much longer.
So where's the German 'growth' machine going to come from? It must come from domestic demand, of course.
Case 2: Germany remains too reliant on exports and government spending to finance growth.
The table above illustrates spending components of German GDP since the previous cyclical peak. The German economy, as measured by GDP, was just 0.1% above its recent cyclical peak in Q1 2011. Domestic demand recovered somewhat, with consumption and government spending having surpassed the 2008 peak by 1.2% and 7.4%, respectively. Spending on machinery and equipment remains 5.4% below its previous peak. It's the government and trade that's driving domestic demand on a cumulative basis.
Here's the reason NOT to get excited about the industrial report: the ECB is trying to clamp down on domestic price pressures via higher interest rates. But Germany is an export machine, so the slowdown in global economic growth (see my post yesterday for one reasonably robust indicator) will do the ECB's job for them without rate hikes. The ECB's doubling down on policy in Germany when the Periphery are attempting to scrape themselves out of a fiscal austerity hole by way of exports to Germany.
BTW: Kurt Annen (German, ironically) provides a free HP Filter add-in for Excel. I coded this some time ago into Gauss, but did not want to spend time on it in Excel (VBA is a terrible language). Thanks Kurt.