Watching for the impact of the Eurozone debt crisis on the economy of Germany
As the nation with the strongest economy in the Eurozone, Germany is closely watched for signals as to whether the Eurozone economy is recovering or declining. On November 7, the world was startled by a statement from European Central Bank President Mario Draghi emphasizing how the data suggest that the Eurozone debt crisis is starting to affect the German economy. The truth of his observation was borne out by a report released by Destatis on the next day, which revealed that German exports declined 2.4 percent in September, despite economists’ expectations for a less-significant, 1.5 percent drop (NYSEARCA:EWG). On a year-over-year basis, exports fell 3.4 percent. The news followed a report that the nation’s industrial production declined 1.8 percent in September.
Evidence that the debt crisis is beginning to impact the Eurozone Core continued to flow in the wake of Draghi’s observation.
On November 13, Germany’s ZEW Economic Sentiment Index for November dropped 4.2 points to negative 15.7. Economists had been expecting the index to make a less-significant decline to negative 10.
On November 15, Eurostat reported that third-quarter GDP fell by 0.1% in the Eurozone. Nevertheless, Destatis reported that Germany’s GDP grew 0.2 percent during the third quarter, beating economists’ expectations for a rise of only 0.1 percent. On a year-over-year basis, Germany’s GDP rose by 0.4 percent.
After that bit of good news, on November 22 Markit Economics released its Flash Germany PMI for November. Although the headline PMI figure increased to 47.9 from October’s 47.7, the result was still in contractionary territory. Beyond that, the text of the report was downright gloomy:
The seasonally adjusted Markit Flash Germany Composite Output Index registered 47.9 in November, only fractionally higher than October’s 47.7 and below the neutral 50.0 value for the seventh successive month. While the latest reading for services activity (48.0) pointed to a moderate pace of contraction, this was the weakest outturn for almost three-and-a-half years. At 47.7 during November, the equivalent index reading for manufacturing output was up since October and well above July’s 39-month low (42.2).
Another overall reduction in German private sector output reflected an ongoing contraction in new business volumes. Lower levels of new work have now been recorded in 15 of the past 16 months.
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Shrinking new business volumes in the service sector contributed to a steep drop in expectations for activity over the next 12 months. The index measuring service providers’ business expectations was the lowest since March 2009. German private sector employment dropped at the sharpest pace since January 2010. A softer fall in manufacturing staffing levels was offset by the most marked decrease in services jobs for three-and-a half years.
A bit of good news finally arrived on November 23, when a report from the Ifo Institute disclosed that German business confidence rose in November. Ifo’s Business Climate Index returned to September’s level of 101.4 after dropping to 100 in October. The Business Climate Index began sinking in May after it reached 109.7 in April. German Business Confidence Rises
The chart for Germany’s DAX Index (below) features what is actually a quadruple top (indicated by green bar) suggesting a further decline. (Chart courtesy of Stockcharts.com) However, after a few days, the index reversed course and quickly broke above its 50-day moving average of 7,274. On November 23, the DAX Index closed at 7,309. Its next resistance point is 7,451 – its September 21 high.
The chart for the iShares MSCI Germany Index ETF (NYSEARCA:EWG) exhibits a similar pattern. At the November 23 closing price of $23.14, EWG just broke above its 50-day moving average of $22.85. EWG’s next resistance point is its October 17 high of $23.58 – just 44 cents away.
The charts for both the DAX Index and the EWG ETF suggest that an advance could be on the way. The question remains as to whether Germany’s economy can motivate investors to pay for that advance. Fiscal Cliff and European Sovereign Debt Concerns Recede
Europe ETF Update: (bold Heading 3)
Vanguard MSCI Europe ETF (NYSEARCA:VGK): +2.50%, This ETF is designed to track the performance of the MSCI Europe Index. The MSCI Europe Index tracks Europe stock market performance as reflected by the performance of top companies and sectors in developed Europe including France, Germany, Greece, The United Kingdom, Sweden, Norway, and Italy.
iShares MSCI Germany Index Fund ETF (NYSEARCA:EWG): +2.98%, This ETF is designed to track the performance of the MSCI Germany Index. The MSCI Germany Index tracks German stock market performance as reflected by the performance of top companies and sectors in Germany including Siemens, Bayer, SAP, and Deutsche Bank. Learn More About iShares ETFs
Bottom line: While the world watches the German economy for signals as to the economic fate of the Eurozone, the evidence of a struggle is more apparent from economic data than from the charts for the DAX Index and the EWG ETF, which appear more positive.