Brian BollenFriday the 13th has been widely viewed as unlucky ever since King Philip of France launched a dawn raid on the Knights Templar on that day in October 1307. Exactly 710 years later, there are clear grounds, in economic terms at least, for questioning the continuing validity of the superstition.
Investors in Germany, for example, could be forgiven for thinking that instead of a day of shock and horror, Friday the 13th represents Christmas come early as the DAX stock market index headed to new record heights.
Deutsche Börse, the German stock exchange, confirms that the DAX index yesterday (12 October) hit 13,000 points intra-day for the first time in its history. “Today [Friday 13 October] we had another high of 13,036 points at 2:01pm,” said a spokesperson (background DAX image courtesy of Quant.Insight).
Germany still the engine
This is no real surprise to any follower of the German economy. Most recent economic data emerging from the country that remains the engine of the eurozone (helped by the exchange rate advantage conferred by the introduction of the euro) have been positive, or at the very least encouraging.
Inflation is steady. Industrial production is expanding. Economic strength and a reputation for quality manufacturing are so deeply entrenched that economists do not expect the indecisive results recorded in the recent election to have much in the way of short- to medium-term impact.
Hard data are again catching up with buoyant sentiment indicators, said Carsten Brzeski, ING's chief economist for Germany and Austria, in a recent article here on the subject (LINK). Not least in German industrial production.
Up and running
As we noted here early this week, this is up and running again after a summer lull. Statistics from the German Federal Statistical office (Destatis) show production in August was up 2.6% from the previous month.
- Production in industry excluding energy and construction was up 3.2% in August.
- The production of capital goods increased by 4.8%
- The production of consumer goods rose by 2.1%
- The production of intermediate goods rose 1.8%
- Energy production was up 1.7%
The only negative was in construction, where production fell by 1.2%.
PMI hits highest for more than six years
Another important measure of sentiment, the Markit Flash Composite Purchasing Managers’ Index (PMI), rose to its highest level for more than six years in September, reaching 57.8, up from 55.8 in August.
The rise was driven by stronger manufacturing and services PMI readings. In September, output and new orders accelerated sharply, as did new export orders. As a result, employment continued to rise robustly. Backlogs of work also rose strongly.
While input costs rose at the fastest pace in five months, manufacturers have largely passed on to customers. IHS Markit itself commented that the increase indicates that Germany’s private sector economy in rude health, highlighting strong broad-based growth in both business activity and employment.
50-plus for more than four years
Christopher McInnes, an economist at FocusEconomics, notes that this figure, which is the result of a survey of over 1,000 manufacturing and service businesses based in Germany - has now remained above 50 the threshold indicating expansion, since April 2013.
FocusEconomics says that panellists polled by it say they expect industrial production to expand by 2.5% in 2017, unchanged from the previous month’s forecast. For 2018, the panel sees industrial production increasing 1.9%, down 0.1 percentage points month-on-month.
Not everything in the garden is rosy, however. Consumer confidence, for instance, is slipping. “Excellent consumer sentiment will not continue unabated in September,” states the GfK market research group in its Consumer Climate Survey published towards the end of that month.
Income, propensity to buy both fall
Both income expectations and propensity to buy decreased. On the other hand, economic expectations increased slightly. GfK is forecasting a decrease in consumer climate for October of 0.1 points in comparison to the previous month to 10.8 points.
Germans still view their economy as being on the upswing and the employment market regularly sends positive signals, adds GfK. The unemployment rate has continued to drop while the working population has carried on growing.
According to forecasts by economic experts, more than a half-million employees should be added in this year alone. Currently, the workforce totals more than 44 million people, which is the largest number ever in the post-reunification era. This strength is also trickling over into gross domestic product (GDP) growth figures.
GfK on GDP
GfK notes that according to the German Federal Office of Statistics, adjusted calendar figures (taking into consideration of the difference in the number of business days) for the second quarter show GDP growth of 2.1 percent in comparison with the preceding year, after growing by 2.0 percent in the first three months of the year.
In our own recent previous coverage, Carsten Brzeski identified a number of external potential threats to an above-potential growth rate. These include geopolitical risk, a stronger euro, a possible slowdown of the US and UK economies and the transformation of China from an export destination to a commercial competitor that must be taken seriously.
Another potential cloud on the horizon relates to the car industry, the mainstay of the German economy. Chancellor Angela Merkel expressed her support for the industry when it was hit by the diesel and cartel scandals. A country with a lesser reputation would have struggled to recover from such shocks.
Merkel position weaker
But her position has weakened following the indecisive results recorded in the recent elections. If she has to strike a multi-faceted coalition government agreement that includes the country's Green party, which is in favour of a rapid shift to technologies that are by definition greener, she might have to change her tune.
The view from Coutts
Sven Balzer, resident German expert at Coutts, comments that traditionally Germany has had a high export/low consumption economy. Much of the growth came from exports because Germany lowered employment costs in the 1990s and outsourced production more than other eurozone countries, for example to eastern Europe.
Also German companies were very early in exporting to emerging markets which allowed them to secure market share. Germany has gained export market share consistently, especially since 2008/9 leading to a considerable external surplus (often criticised now by foreign politicians).
Many have also pointed to the so called Hartz labour market reforms from 2003 introducing further labour market flexibility and cutting unemployment benefits, he adds. This has certainly contributed but many now also point out that that came at the cost of reduced job security and increased poverty.
Sven Balzer, courtesy of Coutts
Education and training
Balzer also points to the educational and hands-on training system in Germany, the drive to modernise (high robotics stock) and the large number of family-owned mid-sized companies that are very reactive and innovative. “I don’t think it is all about costs,” he says.
“This all has led to robust GDP growth, a constantly falling unemployment rate since 2005 (only briefly interrupted in 2008/9) with a high total employment rate of nearly 75% (vs 64% in France or 60% in Spain). The weight of industry in the economy is higher than in France, Spain or Italy.
“Recently the economy has changed as it moved away slowly from this very export-driven growth. Domestic growth has actually been boosted by domestic demand and this trend is likely to continue on the back of the tight labour market.”
Consolidation for DAX?
Recent DAX performance reflects the global trade growth (good for exporters) and also the strong domestic backdrop, he adds. “In the short term the index probably needs to consolidate after the sharp move but as long as the global economy remains strong it would support the DAX further on.
“Are there any clouds on the horizon? The German economy and companies need to be careful to continue to modernise. Because of the specialisation in cars, chemicals, capital goods there may be questions about the growth prospects of these sectors.
“Cars are the obvious ones and the German car industry (which had a great run) is now trying to innovate in electric car development. Capital goods may be growing less because of a declining weight of industry in the future.
“Germany is traditionally less strong in the information and communications technology sector compared to the US or UK,” he concludes.
