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Economy in Brief

Germany Snaps Back- Bazinga Europe: You Don't!
by Robert Brusca  May 25, 2016

Month-to-month the German Ifo gauge of industry has snapped back with its headline metric rising to 8.5 in May from 6.4 in April. The business situation index has advanced to 17.1 from 15.3. Expectations reversed course to rise to 0.2 after logging a -2.1 reading in April. But viewed more broadly, the German Ifo gauge is still basically moving sideways.

Rising tide carries all ships

The Ifo industry gauges (net diffusion readings) all advanced on the month with wholesaling rising to a 13.1 reading in May from 10.7 in April. Retailing rose to 11.1, a sharp advance from April's 6.8. Manufacturing moved up to post a 7.8 reading, compared to April's 6.5. Construction also moved up smartly to log a 3.4 reading in May from a 0.5 net in April. All sectors show advancing activity underway and all improved month-to-month.

But different waterlines...

Still, the standings of the various sectors are quite different. The strength of the standings is gauged relative to each sectors' own history back to 1991. These show retailing in the top 5% of its historic queue (95.7 queue standing). Construction, with a weaker net diffusion reading, has an even higher queue standing, one that has been better only 1% of the time. Wholesaling has an 84th percentile (top 16%) queue standing. Manufacturing, despite having the third highest sector raw diffusion score, has only a 45th percentile queue standing. It stands below its median gauge for the period. This underlines how much stronger manufacturing has been historically compared to how it is performing right now. The German economy usually is led by this sector, but instead it is being led by retailing with a strong kick from the smaller construction sector.

On balance...

This is a very solid/strong report with its headline index in its 72nd percentile, weaker than most sector gauges, because the manufacturing sector pulls it down and has such a dominate weight.

As goes Germany so goes EMU - NOT!

Germany also reported out its forward-looking consumer climate index from GfK which shows yet another rise in consumer climate on tap for June. Its GfK reading is rising to its strongest reading since September. The Ifo gauge also is higher with its best reading since December, unlike the ZEW index, reported yesterday, which backtracked. German consumer climate has a legacy of steady monthly increases since hitting its local low in December of last year. Yet, France, Italy and the U.K. each have progressively lower consumer assessments on that same timeline. In data released today, Italy posted a drop in industrial orders with especially poor strength in its foreign component. Italian trade outside the EU area showed a sharply smaller deficit but with exports falling; the `improvement' is on the back of imploding imports - that is not a good sign- and may not really be `good' news. Meanwhile, Spain is recoding its weakest PPI (April) since 2009. ECB `stimulus' hardly seems to be working outside Germany and the Germans don't want it.

Germany is the Las Vegas of Europe

The lesson here clearly is that Germany is the Las Vegas of the EMU- what happens in Germany stays in Germany. That certainly goes for growth and domestic demand stimulus. Germany does not seem to broadcast any -or much- positive coattail on which the rest of Europe may ride. Indeed, since Germany's strength has depended on its export prowess, better German growth often comes at the expense of domestic demand purloined from its neighboring nations. Despite the fact that German growth is being led in this cycle by retailing, there is little evidence that German domestic demand (historically strong though it is) has benefited the rest of the EMU community as German trade surpluses remain massive. We could rename this modern EMU-Germany as Deutsch-Island (formerly Deutschland).

Europe's Hitchcock moment: the suspense Zone

Global signals are mixed and mixed up. In addition to the opposite Italian and French signals, there was strength in U.K. auto output on the back of strong foreign sector demand. Global stock markets improved and oil nuzzled the $50/barrel mark as (for a day at least). Diminished fears of Brexit and of a U.S. rate hike are reported. We will see what happens when the real fireworks start. Some people like fireworks; some don't. Dogs and cats often hide under the bed; dogs may bark loudly. How will Europe react... in the event? We have little sense that most of Europe is well positioned for a U.S. rate hike however brave its markets may seem now. Many securities in Europe post negative rates of interest. The low rates are harming banks. It is now like a real Alfred Hitchcock suspense film. Hitchcock used to say that if two men are in a room and a bomb goes off they are simply dead and there is no suspense. But if you see the two men in the room, a camera shot of the bomb ticking, another of the timer counting down, and the men sitting and talking and staying... you have suspense. As time goes on the suspense will build, even if they leave the room before the explosion. You can create a great deal of suspense even if no one is harmed. Europe has crossed into the suspense Zone although it is unlikely that `no one' will be harmed.

Negative rates -the ticking bomb- or black-hole of Europe

We can see the ill effects of negative rates on banks. Germany may be able to withstand them, but the rest of Europe is being pulled into a destructive vortex. Germany does not provide a countervailing force, rather it is like a planet in a high enough orbit to avoid the pull of a black hole that is sucking in the other members and the planet Germany is too far away for its own gravitational field's pull to help them. Sorry other Europe. Germany will soon be in a solar system all on its own while the rest of Europe has to deal with chronic implosion and chaos. And a Fed rate hike is only going to accelerate the out-of-control spin.

A metaphorical forecast? (p.s. I never met-a-phor I didn't like)

I don't know if this will turn out to be a metaphor of a euro breakup or not (you know what Neil Sedaka said about breaking up...). Europe has gone to the brink of break up before only to step back. This week the IMF blinked and backed off in its debt forgiveness demands that Germany (of course!) opposed paving the way for funds to flow to Greece. But repeated brinksmanship is dangerous. These tensions and effects on the EMU are clear real-world effects not just metaphorical flourishes. The Germans are resisting policy moves meant to damp the impact of the strains on other member nations because Germany does not need them, want them or approve of them. Can this sort of divisiveness lead anywhere that is good as the euro-cracks widen or does crack kill?

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