Good economic news from Germany, finally...

It is difficult to be optimistic about the German economy. For years, they have paid more attention to their public finances than to their infrastructure. The major automotive industry has been stumbling from one problem to the next for years. At the moment they are still producing a third less cars than in 2012. And now that the demand for cars is recovering worldwide, there is also fierce competition from China. The energy-intensive industry is struggling because of the high and uncertain energy prices. Germany has also taken in more than a million Ukrainian refugees (the Netherlands just under 95.000). And now the German football women have also been kicked out of the World Cup early by Columbia and Morocco ...

At such a time, good news is desired. That came this morning. The volume of new orders in German manufacturing was 7,0% higher in June than in May. For the first time since February last year, the order intake was also higher than in the same month a year earlier.

The question is whether this has started a new trend or whether it is just about volatility. In favor of an optimistic view, some of the previous weakness has been caused by companies running down inventories. Such a process will eventually come to an end. If stock depletion suddenly gives way to stock building, things can go fast. Perhaps entrepreneurs have drawn heavily on inventories in anticipation of a recession. If that does not happen, there may come a time when a company changes its approach.

A more negative narrative builds on other arguments. Of course a 7% increase in orders in one month is great, but according to Destatis, Germany's CBS, the figure has been helped by an 89% increase in orders in aviation. This probably concerns one or a few orders from within the EU. Orders from other EU countries increased by 27%. Domestic orders, on the other hand, were still down 2% month-on-month.

Another nuance to this optimism is that orders have been very volatile in recent months. Nice, that 7,0% increase in June, which by the way follows an almost equally nice 6,2% increase in May. On the other hand, orders fell by almost 11% in March. If we compare June with February, there is a reasonable, but not spectacular +1,4%.

We will really have to wait a few months to see if there really is any recovery.  

While I'm working on bright spots, it should also be mentioned that the Dutch NEVI index, the confidence index of purchasing managers in the industry, became slightly less negative in July: 45,3 against 43,8 in June. The fact that the value is still below 50 implies that the sector remains under considerable pressure. However, the pessimism is diminishing somewhat. That's a start. A week earlier, it appeared that the CBS index, which measures producer confidence in the manufacturing industry, fell slightly further in July. With an increase in July, the NEVI index deviates from what is happening in other countries. So here too we should not immediately become euphoric, but it is certainly a bright spot.

European inflation continues to fall. In July, the counter is provisionally at 5,3%. In June it was still 5,5%. Eurostat also published figures for four underlying product groups to accompany these provisional figures. Inflation slowed in industrial goods (5,0% in July against 5,5% in June) and food (10,8% in July, after 11,6% in June). In energy, the pace of price declines accelerated: -6,1% in July against -5,6% in June. The bad news came from the services sector. Inflation rose there: from 5,4% in June to 5,6% in July. Core inflation, ie inflation excluding energy, food, alcohol and tobacco, was stable at 5,5%.

This inflation report offers 'something for everyone'. Hawks within the ECB will point to persistent inflation in the labour-intensive services sector. Pigeons, on the other hand, point to the downward trend in the overall inflation rate. There is a good chance that this trend will continue in the coming months. In August, September and October last year, prices rose by more than 1% each month. That chance now seems small. If the monthly increase in the coming months is smaller than last year, the inflation rate will fall due to base effects.

Base effects will also play into the hands of a sharp fall in Dutch inflation in the coming months. According to the 'quick estimate' of the CBS, our inflation has fallen from 5,7% in June to 4,6% in July. That was actually still disappointing to me, because it implies that prices still rose about 1,1% in July compared to June. This was undoubtedly due to the increase in excise duties on fuels, or more accurately, the partial termination of the temporary excise duty reduction implemented in April last year. Furthermore, the increased price of crude oil will have contributed to the monthly price increase. Finally, inflation will also have received a push (up) from rents. They have a weight of approximately 20% in our inflation basket. Rents are tightly controlled in our country, even in the 'free sector'. Nevertheless, the maximum rent increase this year is higher than last year. Statistics Netherlands has not yet published the details, but the annual rent increase, which always takes place in July, will probably have been higher this year than last year's 3,0%.

Eurozone GDP grew by 0,3% in the second quarter compared to the first quarter, according to preliminary figures. That did not disappoint. As usual, there was a wide variation between different countries. For example, the Italian economy contracted by 0,3%, the German economy stagnated, but the French economy grew by 0,5%. Details that could explain the differences are not yet available.

Argument for further rate hikes
Orders placed with German industry in June were no less than 7,0% higher than in May. This may imply that the inventory run-down process is coming to an end. That would be good news. On the other hand, the June figure was helped by a sharp increase in orders in aircraft construction. These are 'bulky' orders and therefore often volatile. Because the amounts involved are large, it has a noticeable impact on the total figure. It remains to be seen whether the improvement will continue in the coming months.

According to the NEVI index, Dutch industrial entrepreneurs have become slightly less negative about the future. This means that the index deviates from what comparable figures in other countries show.

Inflation in the eurozone and in the Netherlands fell further in July. Core inflation has not fallen and inflation in the labour-intensive services sector has actually increased somewhat in the eurozone and also at home. This gives the hawks within the ECB an argument to argue for further rate hikes.

The eurozone economy grew by 0,3% in the second quarter. That is slightly better than expected and will also support the hawks within the ECB. The economy has apparently not entered a recession, so that is not an argument for refraining from further rate hikes.

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

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