German Orders Still Strong, but More Are Disbelieving

German orders for December were stronger than expected, a mild positive surprise to markets. With the economy showing weakening signals and the euro strong, sentiment is shifting to look for some weaker results. As a result the spin on the numbers reported today was to sort of set them aside as though they were something that would not last. And, indeed, they may not last.

The German foreign orders series showed that foreign orders from non-German Euro Area countries fell by 6.8% after a 6.7% rise in November. This also raises questions about what is going on within the Euro Area (EA). Foreign orders at German firms from outside the EA rose by 0.8% in the month after falling in November.

One thing to understand is that Germany is the STRONGEST of the EA economies. Other EA countries will be feeling pain before Germany does. We can see this by looking at one measure of competitiveness, prices. HICP prices in Germany have fallen by 11.5% relative to the EA average since January of 1996. Compare this to Italy where its HICP has risen by 3.7% or Spain where its prices have risen relative to the average by 12.2%. That sort of result implies a huge difference in competitiveness for trade both within the EA and outside it. It should come as no surprise that confidence in Italy and Spain has been lagging.

German data are reliable and timely. For other countries we are not always so lucky. But if we piece together the things we know about Germany and the geographic data in reports like today’s orders, there is a real reason to be wary of EA growth going forward. There is the additional unsavory point that Germany itself may be living a bit on borrowed time. Its firms may have employed FX hedges to lock in past more favorable exchange rates on which to do business. But these devices eventually fail in their ability to afford a safe haven or even partial escape. A lot of hedging is done on a six-month horizon and six months ago the euro value Vs the dollar was at $1.34 Compared to the current $1.45 to $1.50 rate. A year ago, a fairly long period over which to hedge the euro rate Vs the dollar was at $1.30. Obviously if hedges set at those times are running off German firms would have to begin to confront business prospects at current exchange rates. Interestingly it is the intra-EA orders that are the weakest for Germany. But it still has a good chunk of business in capital goods that might be a bit less price elastic in Eastern Europe and in Russia. It is no surprise in view of these emerging risks, that ECB president Trichet softened the rhetoric in his remarks today.