Germany is still headed for a downturn despite upbeat data, economists predict
Key Points
German industrial orders for June came in at +2.5% month-on-month, exceeding a forecast of 0.5% and on the surface, indicating a possible reprieve for the ailing economy.
Manufacturing PMI (Purchasing Managers’ Index) data for July came in on Tuesday at 49.5, down from 50.0 in the previous month and entering contraction territory for the first time since October 2018.
The outlook for the German economy remains bleak despite slightly promising data published on Tuesday, leading German economists agree.
German industrial orders for June came in at +2.5% month-on-month, exceeding a forecast of 0.5% and on the surface, indicating a possible reprieve for the ailing economy. However, the adjusted year-on-year figure was -3.6%, and there is more to the data than meets the eye.
German economists on Tuesday were quick to point out that the better-than-expected figure relied heavily on large orders, such as airplanes and ship building.
“If you adjust the data for the very volatile big ticket orders, then there is no longer a +2.5% but a -0.4%, so in terms of the core category, manufacturing orders in Germany are still declining,” Commerzbank Chief Economist Joerg Kraemer told CNBC’s “Squawk Box Europe” Tuesday.
Manufacturing PMI (Purchasing Managers’ Index) data for July came in on Tuesday at 49.5, down from 50.0 in the previous month and entering contraction territory for the first time since October 2018.
Trickling into the labor market
Kraemer pointed to business climate data from the Ifo Institute for Economic Research, along with July’s PMIs, as further indicators that the overall trend is downward.
“The service sector IFO PMI is showing its first signs of weakness, so this means that the domestic economy in Germany obviously started to follow downwards the export-led sector, which suffers for more than a year,” he added.
With today’s data, new orders have dropped by an average of 0.7% month-on-month every single month since the start of the year.
Kraemer pointed out that while we have yet to see a drop in overall employment in Germany, despite major corporations such as BASF, Siemens and Deutsche Bank implementing job cuts, unemployment is no longer falling.
“Therefore, there are the first signs that the one-and-a-half year weakness in the export sectors is starting to affect the labor market,” he said.
“I expect after shrinkage of second-quarter German GDP (gross domestic product), I can imagine that in the third quarter we might see a slight decline in GDP.”
He suggested the downbeat data was compounded by the absence of the “much-hoped for upswing in China,” along with weakness in the German car industry, and thus the downward trends had not yet bottomed out.
June’s data increase was driven by non-euro zone orders, which increased by 8.6% month-on-month, while domestic orders fell by 1% and euro zone orders dropped for the third month in a row.
Carsten Brzeski, chief German economist at ING, said in a note Tuesday that the continued weakening of demand from within the euro zone suggested that the biggest problem facing German industry “might not be the weaker global economy but rather a new weakening of the euro zone — a trend which will clearly ring more alarm bells at the European Central Bank (ECB).”
‘Not out of the woods’
Brzeski highlighted that over the last year, Germany has exhibited a complete reversal of the growth supportive trend of low inventories and full order books to high inventories and shrinking order books, which “does not bode well for industrial production in the coming months.”
This has been the case on two occasions during the last decade, he said, in 2008/9 and 2012. While the current situation more closely resembles the latter, which ended with a fairly insignificant industrial recession, Brzeski suggested that the more painful downturn of the 2008/9 period could emerge surprisingly quickly if the “negative sentiment loop continues.”
No stimulus on the horizon
While many expect the ECB to announce a cut to interest rates in September, German economists are not expecting any fiscal stimulus on the domestic level.
Both Kraemer and Kiel Institute economist Jens Boysen-Hogrefe agreed that while there is more pain to come for Germany’s manufacturing sector, the nation’s current construction boom would inhibit any government stimulus program.
“The German economy is a kind of split economy — you have the export sector, the manufacturing sector, which is in a kind of recession, and you have the domestic economy, especially the construction sector, which is booming,” Kraemer explained.
“Therefore the kind of public spending which normally goes through the construction industry does not make sense because capacity utilization in the construction industry in Germany is extremely high.”
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