Thursday, August 13, 2009

Germany and France Return to Positive GDP on Auto Stimulus and Import Reductions

First, let me throw the caveat out that "positive" GDP is not something I'd consider an end to a recession but the financial press and governments like convenient data points and Gross Domestic Product is the one they seem to use. Second, while I know most of the tricks inside the US government reporting of GDP I have no familiarity with what France and Germany do for their GDP report. Third, many of these countries have been running at negative GDP for 3-4 quarters in a row (i.e. the US has printed 4 negative GDP quarters for the first time since the Great Depression), so just from a mechanical perspective if you go "less bad" over time, the mechanics of GDP reporting mean you turn positive... at least in the US style of reporting and I am sure most countries adopted somewhat similar framework for their GDP reports.

With those caveats both France and Germany returned to slightly positive GDP growth in the past quarter. Remember all those folks who told us the US was heading first into the recession so would be the first out? Well, they are still the same folks showing up daily on CNBC who never have to answer for being wrong on previous calls. This is thesis # 876 they have gotten wrong but not to worry - as long as they chime in "always buy stocks, stay fully invested, the stock market is the best thing ever in the long run" they keep their slots on TV and no one ever goes back and says "Well Chuck, it looks like in April 2008 you said the US was the first in recession so it would be the first out - do you apologize for being wrong yet again?" ;)

While we were being yelled at from the TV screen about how the US would lead the world out of recession (again for no other good reason other than it was the first to fall into it) - we had a different thesis. We said the US would lag much of the world. Why? Because most other countries were only dealing with a recession (borne of the a virus from the US). Meanwhile the US was dealing with a financial implosion AND recession. (same with the UK, Spain, Ireland) So would not common sense dictate that the countries only dealing with the recession and not the nexus of the financial implosion be the first to recover. Don't answer that - it was simply a rhetorical.... common sense has no place on "Happy TV".

Now let's be clear the European banks have had some issues as well, but much of it was due to buying US snake oil salesmen (inveestment banking) products. Germany and France never wavered off the 20% down "old school" mortgage idea, and hence never had housing bubbles and crashed. Spain, UK, Ireland all followed the US model of "financial innovation" and you see the results.

As we read this story let's also remember that Germany has a massive cash for clunkers program as well - that German automakers are now fearful of the results once the government teat is taken away. [Jun 17, 2009: European Automakers Worry about End of Handouts] And that France actually did a stimulus program that is working at getting people to work, unlike Porkalopus that passed in the U.S. [Jul 7, 2009: NYT - France Stimulus Projects, Unlike U.S. Were Shovel Ready] Gosh, the "socialists" are winning even at jump starting their GDPs.

I also want to make it clear I don't think temporary government spending as stimulus is necessarily "bad" - if a country runs surpluses, or at least close to break even most of the time. If they choose to dip into those surplus funds or run "a bit" into the red during bad times (with the understanding of saving for rainy days during good times) to help stoke the economy in the short run... I get it. What is at issue are countries running massive deficits permanently, who have no hope of ever paying back their creditors who then go even farther in hock for their stimulus. Only burdening their future generations for the benefit of the current. For example we cited Chile - which had a surplus and used it to buffer during bad times. [May 28, 2009: WSJ - Prudent Chile Thrives Amid Downturn] As did Brazil. As did China. That's different than what the US is doing... who just increases spending in good times or bad.

Anyhow, considering Germany is such a massive exporter [May 21, 2008: Who is the World's Largest Merchandise Exporter? Not China. Or the US] this positive GDP print was a bit of a surprise but considering how much of an impact the US cash for clunker program will have on GDP, and considering Germany's was even bigger [Mar 3, 2009: German Auto Sales Boom to 10 Year High Due to Government Scrap Bonus] it seems feasible they went positive on GDP. It will be very interesting to see how the country copes when their clunker program ends - much like China they are heavily depenedent on the world's consumers (that's you dear reader) to start shopping again in earnest.
  • In Germany, Europe’s largest economy, second-quarter GDP rose a seasonally adjusted 0.3 percent from the first quarter, when it dropped 3.5 percent. The French economy also expanded 0.3 percent in the latest quarter.
  • That marked the first quarterly gain since the first quarter of 2008 for Germany, indicating that the euro zone's largest economy is gradually recovering from the worst recession since World War II.
Now stuff like this is why I am suspicious of any of these numbers - but again, I have no knowledge of the inner working of foreign GDP mechanics.
  • German GDP shrank 5.9% in the second quarter from the year-earlier period, when adjusted for the number of working days each year, the data showed. There were three fewer working days in the second quarter of 2009 than in the same period of 2008.
That tells a different story no?
  • The statistics office said government spending and private consumption boosted economic activity in the second quarter. Construction investment and net exports were supportive too, but a running-down of stocks depressed quarterly economic growth.
  • Unicredit economist Andreas Rees reckons that the export-dependent auto sector contributed 0.25 percentage point to overall German GDP growth.
  • The figures highlight shifting fortunes across Europe’s largest economies. In the U.K., where Prime Minister Gordon Brown is struggling to shore up his popularity before elections due in June, GDP contracted 0.8 percent in the second quarter, more than twice what economists forecast.
  • ....the euro zone economy is 4.6 percent smaller than a year ago and that could take two to three years of solid economic growth to make up.
And that's just how math works, after you shrink so sharply, it doesn't take much to show a decent % gain.

And just as in the US, a drop in imports (due to a weak consumer) "helped" GDP since it narrows the trade deficit. Put another way if exports fall 20% and imports fall 40%, your GDP skyrockets. Which is why these figures are more or less useless in telling me much... but we have to respect the stock market mavens use them as gospel.
  • Economists also stressed that the road to recovery will not be straightforward — especially as much of the improvement in Germany and France was due to very sharp falls in imports, which reduced trade deficits and lessened the GDP reduction stemming from the net trade balance.

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