Market Analysis

German(e) Data

While the PIIGS have again dominated headlines over the last week, Germany’s quietly notched a smattering of positive data. German retail sales rose 0.8% month over month in March, rebounding from a downwardly revised -0.9% m/m contraction in February. Factory orders rose 2.2% m/m in March from a 0.6% m/m increase in February. Analysts had expected only a 0.5% increase. Tuesday, German industrial production rose a seasonally adjusted 2.8% m/m, versus expectations for a 0.8% m/m increase. And Wednesday, German exports rose 0.9% m/m—the third consecutive monthly increase. Imports also increased—1.2% m/m. Both imports and exports notched all-time highs in Germany.

In a vacuum, such data hardly seem to paint a picture of a country on the brink. Though that’s been a concern for some time now—that Germany, while certainly strong relative to the rest of the eurozone, would ultimately succumb and follow into recession. Germany’s Q4 2011 GDP contracted -0.2% q/q, so if the country were to notch another negative number in Q1, it would (by a commonly cited definition) enter technical recession territory. And sure, that’s possible, though it’s just hard to imagine German GDP contracting too significantly in Q1 when so many data points are logging growth and even acceleration. Even if Germany does technically enter a recession, it’s similarly hard to believe it will contract much more severely than it did in Q4—meaning a recession could be short-lived and rather shallow.

Which likely leads many to wonder what Germany’s status implies for the eurozone and Europe as a whole. To be sure, relative resilience in Germany is no all-clear sign—either for Germany itself or for broader Europe. But it would seemingly argue to an extent against the likelihood of an imminent, disastrous European implosion. Granted, the Greeks seem to be doing their best at the moment, once again, to rattle nerves—of investors and politicians alike.

But the very fact Germany’s exhibited some strength would seemingly incentivize Chancellor Angela Merkel to do what she can to prevent a complete derailment. Maybe Greece ultimately exits the euro. But a near-term shift of that magnitude likely doesn’t do anyone any good—including (maybe especially) Germany. Then, too, Chancellor Merkel, like any politician, is answerable to her constituents. Germans in the state of Schleswig-Holstein recently moved away from Merkel’s coalition and toward her center-left opposition. This weekend, North-Rhine Westphalians takes to the voting booth—and polls at this point are pointing to a similar outcome.

So to an extent, the hard line Merkel’s recently taken on Greece, indicating this time she’ll stand firm and insist on its compliance with reform and budget plans, is probably part politics. And to be sure, it’s a difficult balancing act—particularly with Greece currently mired in protests and relative political disarray.

But when it gets down to brass tacks, Merkel (and possibly even French President-elect FranÇois Hollande) seems more likely to continue taking steps to prevent a disorderly eurozone break-up than to shrug over Greece’s woes and let it go its own way—given the dislocations (political and otherwise) that would ensue.

While some may take Germany’s recent positive data as an indication of further differentiation between struggling and resilient European nations and therefore as a sign of increased strain, it’s also possible Germany’s relative strength increases the political stakes some—which could actually help lead ultimately to further resolution as opposed to dissolution.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.