Bull and bear: German economy strikes back - The Share Centre Blog

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Michael Baxter

Bull and bear: German economy strikes back

Written by: Michael Baxter on January 23rd 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Germany strikes back. Austerity ain’t working, so does that mean we need more or less of it? Businesses are becoming more short term. Clicks up, bucks per click down at Google. Companies in the news: Tate and Lyle, Cairn Energy, Severn Trent.

Germany strikes back

It was just one survey, and not always the most reliable of indicators. Even so, its latest reading is very encouraging.

Throughout much of last year the various surveys relating to the German economy, such as the ZEW index, the IFO index and Purchasing Managers’ Indices, all pointed to an economy either in or very close to recession. As far as the German economy is concerned, the big surprise of last year was that the official data only showed contraction occurring in the final quarter.

Setting aside the normal jibes about economic statistics being as reliable as star signs, for Germany to be officially described as having suffered a double dip recession it will need to have seen contraction in Q1 this year.

Well, that might still happen, but yesterday the latest ZEW Index told quite a different story.

The ZEW Index, a measure of investor’s expectations over the next six months, hit a two and half year high in January.

In fact the index leapt from plus 6.9 in December to plus 31.5 in January, Okay, it’s just numbers, 31.5 what? But the level of the increase shows how significant January’s reading is.

This does not mean Germany is out of the woods. For one thing, investor sentiments are more forward looking, so the positive reading may not show up in data on the economy for several months. For another, returns to investors and what is actually happening in the real economy are not always aligned – not in the short term anyway.

We will have to see what the next IFO and PMIs say before we start drawing conclusions. But this survey ranks alongside surprisingly positive data on the Chinese economy as the most positive indictor seen so far this year. Bulls might say it supports all that positivity we keep hearing about the euro area, and confirms that when the likes of Mario Draghi say the euro is past the worst, he is right.

A bear might say that the trouble with investor sentiment as a guide is that it is just a reflection of the purveying view. We already know what the purveying view is anyway. The savvy investor needs to know whether current thinking is right. At a time when much of the euro area suffers from the kind of unemployment that could be said to be dangerous, and might lead to significant unrest, it could be suggested that the individuals who make up the purveying view are just a tad out of touch with reality.

Austerity ain’t working, so does that mean we need more or less of it?

And so it turned out that December was worse than expected, but at least the earlier months of 2012 were not as bad as previous data suggested.

In December, the public deficit was £15.4 billion, which was £0.6 billion up on December 2011. More worrying still, every month over the last half year has seen a higher deficit than in the corresponding month in 2011.

This is despite VAT receipts rising by 4.9 per cent, and government receipts overall increasing by 3.6 per cent.

In the financial year to date, borrowing is up 7.3 per cent from this point during the last financial year, but on the other hand revisions to past data mean that the figures were not quite as bad as they previously appeared.

This all begs the question of course: is the problem not enough austerity, or is austerity pushing down growth and causing the debts to rise?

Business are becoming more short term

I used to be dominated by short term thinking, but now I tend to focus on what might happen this afternoon. Who said that? Well, actually it was just made up.

However, here is what someone has actually said: “For some time, there have been signs that business leaders have become increasingly short-term in their outlook. Risk aversion and scepticism about the benefits of R&D have institutionalised a cycle of lowered expectations that looks more to quarterly performance rather than a longer-term view of where new growth might come from. These figures suggest that short-termism is now entrenched in the minds of UK business leaders.”  So who said that? Was it some left of centre, anti-market, tree hugger? Err, well, probably not, because those words were in fact uttered by Norman Lewis, a director at PwC. Who knows what Mr Lewis thinks about hugging trees (well presumably Mrs Lewis does), but the point is PwC is not known for its red card carrying dreams of socialism.

Yesterday, timed rather deftly for Davos, PwC unveiled its 16th Annual Global CEO survey: UK focus.

No less than 83 per cent of UK CEOs plan cost reduction this year, which is well below the global average. While 30 per cent are contemplating cross-border M&A, a much higher proportion are planning a domestic deal – 43 per cent  of UK CEOs, compared to a Western European average of just over a quarter and just 11 per cent in Germany.

PwC says: “This suggests that UK businesses see more opportunity than their European counterparts to generate growth in their mature – and currently subdued – home market.”

Or maybe it is a sigh of short term-ism, and indeed inward-ism. Only a third of UK CEOs felt recent falls in Chinese GDP was bad news, compared with a much higher proportion in Germany.

PwC said: “At a time when the UK Government is encouraging businesses to invest in innovation to drive high-value exports, UK CEOs are half as likely to name R&D as a top three priority over the next 12 months as Western European CEOs.”   In fact just 17 per cent listed R&D as a top three priority.

PwC continued: “Only half of UK CEOs say they intend to increase R&D capacity over the coming year, compared to two-thirds of German and three-quarters of French CEOs. Instead, UK CEOs say they’re keener to invest in growing their customer base and improving operational effectiveness.”

It concluded: “The challenge is to understand how and where UK businesses will generate growth in the future. Our experience shows that many recognise the need to be present in fast-growth economies, but end up targeting the UK, US or Western Europe because these markets are more familiar and promise returns on investment within a shorter timeframe.”

Click up, bucks per click down at Google

The bullish news outweighed the bearish news, but the fact there was any bearish news at all is quite interesting.

Revenue at Google in the latest quarter was up 39 per cent, hitting $11.3 billion. Net income increased 6.6 per cent to $2.89 billion.

Paid clicks were up too; up by quite a bit – by 24 per cent in fact.

So far, so very good.

But Google’s revenue per click fell 6 per cent.

It appears that customers are not willing to pay so much for clicks from mobile phones.

What may be worrying for the future are surely mobile searches. On the other hand, the problem to date is that users tend to pay less for purchases from their smart phones than from their desk tops. It is hard to see any reason why this will continue, however. As we get more used to shopping from our phones, and as apps improve, then it seems probable that spending as a result of our mobile searches will rise.

Another worry is that Google enjoyed no less than 93.3 per cent of mobile search traffic. That is worrying because Amazon, Apple and Facebook have other ideas, and it may be hard for Google to maintain such a high market share.

Indeed some say that Google style searches are on their way out, as we tend to focus more on smart phone/tablet apps, Facebook and LinkedIn searches.

The company also made a loss out of its Motorola business, but then that is no surprise. It bought the company for its longer term potential, not for immediate benefit.

Anyway, did you hear the one about Sergey Brin sitting on a train alongside ordinary people? He was wearing Google glasses, and few passengers seemed to know who he was. He just looked like an ordinary guy, no halo above his head, no angels singing of his glory, no stars in the heavens following his movements on the ground.

Mind you, the stars may not follow Brin, but the Google star is far from waning, and investors may well want to follow the company’s big idea, such as its glasses and driverless car. Anyway, here is the picture, of halo-less Brin sitting on a train. Here’s Sergey Brin Chillin’ on the 3 Train in a Pair of Google Glasses

Companies in the news

Under the spotlight today among the tipsters was Tate and Lyle (One for the longer term said Tempus in the ‘Times’), Cairn Energy (“I suspect that the market will start to appreciate it as the year progresses if there is some rare good news on the exploration front,” said Tempus.) and Severn Trent. “Shares could weaken further on sector rotation – hold,” said Questor in the ‘Telegraph’.


These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Cairn Energy, does austerity create debt, German GDP recession recovery Q1, Google results, Severn Trent, Tate and Lyle, UK business R&D short-term, UK public deficit, ZEW index

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