The German economy in October 2016 – rebound?

While in September the clouds hanging over the German economy rather indicated the end of the world (“On the edge“) current October figures seem to indicate a moderate to strong rebound:

After German exports had plunged by 10% in July they rebounced and grew by 5.4% (MoM) in August 2016! Hence, the explanations given for the dismal August figures seem to have been true after all. These new figures correlate with a strong surge in orders according to Germany’s PMI index. The inflation-rate rose from 0.7% in September to 0.8% in October 2016 – the highest rate for two years now. Given these positive figures it comes as no surprise that also the number of insolvency filings of German companies once again dropped by 17.5% (YOY) in July 2016.

In accordance with the figures stated above and even beating expectations, the IFO-Business-Climate Index from 109.5 points in September to 110.5 points in October 2016, reaching its highest level since April 2014. Also, the ZEW Indicator, which had lost 2.5 points in September, rose from 55.1 by 4.4 points to 59.5 in October, the outlook also increasing “moderately”. Hence, both indices are now in accordance and foresee the “golden autumn” already anticipated in the previous month.

Quite interesting to note, though, is, how the PMI uptick as described above is perceived in the German media. While the Frankfurter Allgemeine Zeitung now sees the German economy on a path of strong growth, the Handelsblatttakes a more cautious stance. And, Die Welt takes an even more pessemistic view regarding the longterm development opportunities. First, in an article already published in August (I already reviewed it elsewhere), it analyses the risks of growing inflation for German economy. The view that rising inflation will in the not too far future lead to rising interest rates even against the will of central bankers is now seconded by the IMF (cf. here for a comment in Der Spiegel). Secondly, Die Welt also points to the fact that productivity – especially in certain key-areas – stagnates since several years. So, although the outlook regarding Germany’s economy for the short- to mid-term seems to be decent optimistic, the long-term perspective looks less promissing.

Furthermore, the European banking crisis did not materialise – at least until now. The central banks – though between the lines stating that NIRP/ZIRP and QE may not go on indefintely – have stated throughout the month that they will adhere to the current policy for the time being (FedBoJECB).

And Deutsche Bank – against all odds – survived the month and is now thriving. After a low of 9.92 Euro/share on 30 September, the share price reached 13.45 Euro on 24 October thus indicating at least a pause of the crisis. In between these two extremes a series of notable events took place: First, there was story that Deutsche was able to reach a settlement with the DOJ to settle for 5.4bn USD – leading to a rebound to 11.57 Euro/share already on 30 September. With hindsight, the news, originally issued by AFP, seems to have been a hoax – since CEO Cryan returned empty-handed after personally negotiating with the DOJ on 19 October. Finally, Morgan Stanley still regards the equity ratio of Deutsche as too low – on which news the share price plunged to 12.99 Euro again on 25 October 2016.

After several retail-chains went into crisis-mode last month, the fate of Kaiser’s Tengelmann is still not clear: The negotations about a split of the chain between Edeka and Rewe are still ongoing and in the meantime former German Chancelor Gerhard Schroeder has been engaged as a mediator. The same goes for Air Berlin where the “restructuring” is stuck.

Nevertheless, in comparison with the gloomy outlook, the actual development in October was very positive. Hence, if the various political risks do not materialise, German economy has a fair chance of ending a year with high volatility relatively calm. Given that the US-economy grew by 2.9% and the Chinese by 6.7% in the third quarter of 2016, this outcome does not seem to be too over-optimistic. However, there are still some shadows cast over such a scenario: First, even when accepting the Chinese figures at face value, a large part of Chinese growth stems from real estate (as the Handelsblatt points out) and it is largely built on new debt. Hence, what has been said for the German economy also applies for the global economy: even if the short- and mid-term prospects look promising, the long-term perspective is clouded with debt. That should everybody give some pause…

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