Heavy Pulling in Germany?

2005-09-13T065756Z_01_NOOTR_RTRIDSP_2_OFRBS-FRANCE-PRIX-DETAIL-BS-20050913.jpgRegular readers at Alpha.Sources should know that I am rather sceptic on the Eurozone's ability to sustain growth in 2007 and in fact I have been bearish on the Eurozone ever since the summer 2006 when growth started to wind down and specifically after the third quarter figures which showed a considerable slowdown compared to the very impressive growth rates in Q1 and especially Q2 of 2006. This also means in a general perspective that 2006 will be a record year in terms of economic growth in the Eurozone.

My scepticism and bearishness notwithstanding a thing which is interesting to note here going out of 2007 is the impressive momentum of Germany relative to the other Eurozone economies. Consequently, we saw a few days ago how the total services industry for the Eurozone took a slight dip in December 2006 but also how Germany's services index actually rose a bit at the same time.  This trend is continued if we look at for example consumer confidence where France saw the third consective dip in the index as the fall in unemployment slowed. In Germany the unemployment rate fell to the lowest level since August 2002. Scrutinizing Germany further we find a very upbeat mood as it is almost proclaimed that the much dreaded 3% raise in the VAT (value added tax) actually won't mean much at all.

(From Bloomberg)

Last April, Henning Kreke, chief executive officer of German cosmetics retailer Douglas Holding AG, pleaded for Chancellor Angela Merkel to ditch plans for a sales-tax increase he said would be a ``brake on growth.''

He's much less worried these days. The 3 percentage-point increase, which took effect Jan. 1 and pushed the value-added tax on sales of all goods and services to 19 percent, will only make ``a slight dent in the first quarter,'' Kreke said in a Bloomberg News survey published Dec. 28. Domestic demand ``will continue to develop positively after that,'' he said.

I think we need to be carefull here and I do not all think that domestic demand in Germany will rebound so easily in 2007 on the back of the VAT or at least I think prudence is the important word here. This also brings us to the real powertrain here, the German export sector.

The BGA exporters' and wholesalers' group estimates that sales of German goods abroad, already the highest in the world, rose 13 percent last year. Even as growth was slowing in the U.S., the world's largest economy, demand was rising in eastern Europe and Asia as carmakers, electronics manufacturers and other customers of German companies set up new plants.


The demand was fueled by a growing need for goods used to make other goods, such as BASF AG chemicals, Siemens AG turbines and Linde AG industrial gases. Exports to Russia and China rose almost 25 percent.

German manufacturing orders, adjusted for seasonal swings and inflation, rose 1.5 percent in November, led by a 3 percentage-point jump in foreign demand for capital goods such as machine tools, the Economy and Technology Ministry in Berlin said today.

``Exports have beaten all expectations in 2006,'' said Anton Boerner, head of the BGA, which represents about 135,000 companies. ``For 2007, we are cautiously optimistic at this very high level.''

What is particularly important here is the point about how the German export sector is beginning to leverage exports from other places than the US. This gives new life to the idea of de-coupling but not in the traditional sense where domestic demand picks up to steer the economy towards a more domestically driven growth path. Rather, de-coupling could here be explained as a function of a German export sector's ability to diversify its activities. At the end of the day this is good news but I stil remain sceptical of the general goldilocks discourse and I consequently remain duly bearish but I am indeed watching with interest here.