If the German economy is at half mast, the EU will soon follow suit. (Photo by Emmanuele ... [+]
The German economy contracted a seasonally adjusted 0.1% (Quarter on Quarter) in the three months to June 2019. This was unrevised from the preliminary estimate and following 0.4% growth in the previous period.
Net external demand contributed negatively to the GDP as exports fell faster than imports, while investment in construction declined markedly.
In Q3 2018 the German economy also contracted by 0.1% and yet was able to avoid a recession as the ZEW Indicator of Economic Sentiment (ZEW) slowly recovered from -24.7 In October 2018 to rise to the giddy heights of +3.1 in April.
Will the ZEW save the economy this time?
The ZEW survey recorded that sentiment toward the economic prospects for the euro zone’s leading economy has increased from -22.8 to a significantly better than expected -2.1.
The broad view is that many German economists are fearful that Germany will descend into a recession when GDP Quarter on Quarter growth figures are released on Thursday. However, one must accept that the ZEW reading is a positive that could herald a repetition of last year’s great economic escape.
Sorrowful Signals
I rather think this is wishful thinking as capacity utilization in Germany decreased to 82.60% as Q4 2019 reached its midway point so marking the seventh straight month of decline or static capacity consumption.
Another reason why I am concerned is that manufacturing makes up 22% of all German GDP. Positive thinkers will point out that the IHS Markit/BME Germany Manufacturing PMI was revised higher to 42.1 in October 2019 from a preliminary estimate of 41.9 and compared to the previous month’s final 41.7.
I would counter by saying the latest reading is the 10th month of contraction in the factory sector, as output dropped at a softer pace and new orders fell for a 13th consecutive month, albeit at a slower pace but let’s not split hairs. The contraction in manufacturing is a genuine worry for the Germans.
Germany's seasonally adjusted harmonised unemployment rate stood at a 39-year low of 3.1%, but that masks the fact that in manufacturing employment losses accelerated to its fastest pace since January 2010, as firms reported lower staffing number mostly attributed to a reduction in temporary workers.
On the price front, input costs declined at the quickest rate since March 2016, mainly due to lower prices of metal components, raw steel and plastics. That said, labour costs in Germany collapsed in Q2 this year to 108.22 index pints from 116.69 in Q1. The layoffs in manufacturing comes at a time when industrial productivity has declined to 97.20 in August from 99.20 in July of 2019. Just the latest in series of weakening observations that began tumbling at the end of 2017.
Output costs fell for the fourth successive month and at the sharpest pace since November 2009 and although expectations towards output recovered to a four-month high, sentiment remained negative overall.
Private consumption accounts for 56% of GDP in Germany and so it is with a sense of alarm that I note the GfK consumer sentiment indicator for Germany fell to 9.6 heading into November 2019 from a downwardly revised 9.8 in the previous month. This was shy of the market consensus of 9.8.
I am worried as this is the lowest reading since November 2016. It has been dragged lower by concerns over global economic downturn, trade conflicts, Brexit chaos and rising fears of job losses, particularly in the automotive industry.
Income expectations offers no optimism as sub-index slumped 7.8 points to the lowest in near six years of 39.0 and the economic expectations declined 4.8 points to the lowest since December 2012 of -13.8.
Perhaps even more alarming is that the indicator measuring consumer's willingness to buy fell 3.4 points to 51.7. No wonder GfK researcher Rolf Buerkl said “...Optimism is dwindling...”
He is not wrong and tomorrow morning I sadly expect Germany to roll into a recession.
