The Noose Tightens On Germany’s “Success Recipe”

Wolf Richter's picture

Wolf Richter

Deceptive calm and optimism have settled on the German financial markets. Chancellor Angela Merkel is preparing to go to Greece next week to meet with Prime Minister Antonis Samaras—her first visit to Greece since 2007, long before the crisis had broken out. He’d already praised her for saying “that her heart was bleeding” at the sight of the suffering Greeks, or at the sight of herself with Hitler mustache and Nazi uniform in Greek tabloids. She’ll be noisily welcomed.

Perhaps she is trying to mend fences because Germany, after hyperventilating for two years about its superior economic model, is worried about the economy, and about its export markets, and above all, about the election next year. It would be a heck of a lot easier for her to hang on to power if Germany isn’t in a deep recession by then because exports dried up.

They’d done that before. When the financial crisis hit the US, China, and to a lesser extent Europe, Germany’s customers stopped calling. In the third quarter of 2008, GDP plummeted 2.1% on a quarterly basis, and in the first quarter of 2009 a horrid 3.8%. Annualized, a double-digit swoon. The worst in the history of the Federal Republic. A nightmare no German exporter would ever forget.

They were saved not by their own ingenuity and hard work, and not by their superior economic model, but by the besotted stimulus and QE frenzy in the US, China, and elsewhere. The recovery was steep. And a couple of years later, the gloating started. They called it the German “success recipe.” Well, that was last October.

Now the crisis has wormed its way into every aspect of the economy, and the downturn in export orders is once again spreading fear and trepidation. But this time, the part that had been considered invulnerable is getting slammed: domestic demand.

Monday, it was the machine-tool massacre. Orders for machine tools, one of the coddled key industries in Germany, dropped 11% from prior month, with export orders down 6%—cause: uncertainty, the China slowdown, the Eurozone fiasco. But domestic orders dove 18%.

Tuesday, it was the auto industry massacre. Sales of new passenger vehicles, as measured by registrations, dropped a dizzying 10.9% from September last year. German auto sales had been holding up well despite the crisis and remained positive until summer. But July wasn’t good. August was worse. And September’s huge drop pushed sales for the year deeper into the negative.

There were some winners, notably the Koreans Kia (+44%) and Hyundai (+15.2%)—which have been on a tear since the financial crisis—as well as Porsche and Audi. Mercedes barely eked out a gain. The list of losers was long and included even BMW and market leader VW. Ford fell by 8.8% and Opel by 13.2%. And a harbinger of movements in the larger economy, commercial vehicles (buses, trucks, and tractors) tumbled 15%, with tractors plunging 25.8%.

Wednesday, it was the Composite PMI for manufacturing and service. It declined again in September, after having plunged in August at the steepest rate since June 2009. It was the seventh month in a row of declines. Due to the lack of incoming work, businesses have been living off their shrinking backlog. When that is exhausted, production will nosedive.

Thursday, construction took it on the chin. It had been doing well until six months ago. In September, the intake of new orders by contractors fell sharply, due to “weakening demand in the wider economy.” And the Draghi-Bernanke effect began to rattle some nerves: input price inflation had picked up.

Employment has come under pressure. Opel and Ford are leaking red ink from their head gaskets. Other employers are trying to cut costs as well. But it’s not easy. There are negotiations underway to reinstitute part-time work (Kurzarbeit). Lufthansa just announced that it would slash its administrative work force through early retirements and buyouts. Even the Monster Employment Index, whose year-over-year growth in online ads has been over 30% earlier this year, stumbled on Friday. Its index for August edged up only 7% from prior year, but and on a month-to-month basis, it has been losing ground and is now down 3.2% from its peak in April.

And then came the industrial orders bloodbath. Seasonally adjusted, they dropped 1.3% in August from July, much worse than expected. Export orders only stagnated, thanks to an uptick in orders from the Eurozone, which are still down 12.6% for the year. But domestic orders dropped 3% overall, and 6.8% for capital goods, which left observers breathless.

With shrinking order books and rising inventories, German industry is facing some challenges. Consumers have become reticent. Corporate titans have been busy with disappointing preannouncements. So Metro AG, Germany’s largest retailer and wholesaler, just issued an earnings warning, blaming the weakness in its major markets. And its stock got pummeled.

But the Draghi-Bernanke effect took care of the markets, no worries. Instead, Germany is struggling with its largest wave of foodborne illness. From China. But exports to China are crucial, so the issue will be downplayed assiduously. For that debacle, read.... Chinese Strawberries Sicken 11,200 German Children.

And across the Rhine, something unusual happened. Unusual for France. The government is jacking up taxes, including the capital gains tax. But it was just too much for the hapless entrepreneurs, VCs, artisans, and mom-and-pop business owners: they revolted. Read.... A Capitalist Revolt in Socialist France.

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THE DORK OF CORK's picture

Germany is just as much a creature of the city as  every other Euro Bitch......

They tried to offload their industrial externalties by dumping the rest of the Eurozone is broke because of their stupid short term tactics.

kaiserhoff's picture

Production down during October fest?  Vas Gibts?

steve from virginia's picture


This is the endgame taking place in real time right now. Bye-bye mercantile Germany, down the drain with you.


The subject of this article has nothing to do with Bernanke or Draghi and precious little to do wth the (inept) politicians. All of them are in over their heads, the problem is not with mismanaged industrialization but with industrialization itself.


The process cannibalizes irreplaceable capital leaving useless turds as the return. Germany makes turds: sow the wind reap the whirlwind, Bitchez.


 - Monetary policy is irrelevant, the worth of money is determined at the gasoline pump millions of times per day. Countries may as well rent out their central bank buildings and lay off the staffs.


 - Europe has been bankrupted by its automobiles, now it is time for payback. This is the death march of the auto industry world-wide (it is also the death march of the other industrial enterprises at the same time).


 - The 'breaking price' for fuel has declined since 2008- $147/bbl. Now it is a bit over $110 per barrel. Prices decline b/c people are broke and cannot afford the higher price. At the same time, the price needed to lift new supplies is $90/bbl and rising. Prices rise because the 'easy fuel' has been burned leaving the expensive varieties to struggle with.


Once these two sets of prices converge -- one for the customer the other for the driller -- fuel will not be rationed by price/access to credit, but by physical availablity. The latest these prices converge is a little over two years. The reason for the convergence: 90 million barrels of crude and crude-like substances wasted for zero return every single day.


That is 900 million barrels -- 3 billion 600 million gallons -- wasted every 10 days. This is a staggering burn-through rate of non-renewable industrial capital. There are real consequences to this foolishness, believe it or not!


 - Meanwhile, Germany and the rest of the EU are dependent upon external sources of credit as long as they adhere to the euro. There no way for Europe to lend to itself (like Japan or the US) because there is no such thing as a 'Europe'.


Too late to do anything about it: a self-funding EU entity/ 'United States of Europe' cannot exist because the individual economic components of a Euro-state are insolvent. The process is self-amplifying: the components are insolvent b/c there is a credit embargo ... there is a credit embargo because the EU is insolvent ...


Why? It's not Draghi or Merkel ... instead, Mercedes and Peugeot, BMW and Fiat ... freeways and suburbs, office towers and finance, militaries and oil companies, all the  other wasteful fetishes ... none of which pay for themselves or ever have paid for themselves ... all of which require bottomless supplies of cheap debt to keep afloat ... and it's all over now, baby!


The problem is at the end of your driveway, folks. It or you, cling onto the fantasy and you and your countries, your families, your wealth and everything you have ever cared about are swept away. Wait too long and there is no escape: Conservation by other means.


Element's picture

You sound like you're in pain there Steve, take a break mate.

El's picture

If you do not dispose of a rotting piece of fruit, it will cause the good fruit to rot as well. This is fundamental and yet policies world wide are to carefully hoard the rotten fruit.

sangell's picture

Instead of going to Athens to listen to Samaras whine maybe Merkel should pay a visit to her old bosses in Moscow.

skepsis101's picture

The modern "federalism" of Europe has always been a sick joke superimposed by bankers and politicians, and simply will not abide much longer. Anyone even remotely familiar with the cultural differences between countries like Spain and Holland, or Germany and Greece (yet alone Montenegro and Finland) must laugh at the notion that a one-size-fits-all economic system had more than a generation's lifespan.  Maybe a Charlemagne or Herr Hitler would have strong-armed a single military empire, but we all know where that led.  Personally, I look forward to the break of Europe into smaller and more distinctive communities instead of this homogenous gloss of modernity.  Long live diversity!

StychoKiller's picture

Aside from all that Ms. Merkel, how is the economy?

TheMadNumismatist's picture

The only ways for Europe to become a federal entity is for a change in the German constitution. This is not going to happen any time soon, without a whole bunch of pain being laid upon them. Germany has, I believe, been deliberately fudging the issues from day one waiting for the crisis to hit home. When that happens, the Germans will beg for constitutional change.

Including target 2 balances, Germany is already on the hook for about E1,500 billion, and Merkel knows that they need that money to support their own banks.

bank guy in Brussels's picture

So Germany needs a bailout now, too ...

Maybe Merkel is going to meet Greek PM Samaras to pick up some background colour and pointers, on what it feels like to get economically crushed

Maybe now Germany is knocked off the high horse, we can at last have some EU 'solidarity', as it is realised that all of us may be heading to where the Greeks have arrived

Middle_Finger_Market's picture

High horse indead. 100% sure the Germans have looked into a 'Ger-exit' (Great German Exit). 

blueRidgeBoy's picture

by your comments, I realize your userName is truthful