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Aaand It Just Keeps Getting Worse For German Manufacturing (And French Services)

Riders on the storm.

Well, the economic picture continues to darken for Germany.

Earlier this month, data showed German industrial output logged its largest annual drop in nearly a decade in November, and that came hot on the heels of lackluster factory orders data, which betrayed an 11.6% drop in orders from the rest of the eurozone. Here’s the former on a chart, because you really need the visual for context.



In its updated World Economic Outlook, the IMF was particularly tough on Germany. The Fund’s projected growth for the year was revised down by 0.6% from the October projection.


Well, things got worse on Thursday as the IHS Markit manufacturing PMI fell into contraction territory for the first time in four years, diving to 49.9 from 51.5. New orders cratered from 47.7 to 45.3, the lowest reading since December 2012 and the fourth consecutive month in contraction territory.

Meanwhile, the French services PMI dropped to 47.5 from 49 in December. That’s the lowest reading since February 2014. The reading on new business (46.7) was the weakest since June 2013.



If you’re wondering whether the weak read on French services is at least partially attributable to the “Yellow Vest” protests, the answer is “probably, but we’re going to dodge that question for now” – or something. Here’s the official answer from IHS Markit:

Private sector firms in France reported a further contraction in output during the opening month of 2019. The latest decline was the fastest for over four years, even quicker than the fall in protest-hit December. The strong service sector that had supported a weak manufacturing sector in the second half 2018 declined at a faster rate in January. Meanwhile, manufacturers recovered to register broadly-unchanged production. Despite the continuation of ‘gilets jaunes’ protests, it’s unclear whether the latest weak performance was caused by the resulting disruption, or whether the anticipated global economic slowdown for 2019 is already beginning to take hold.

In any event, this just adds to concerns that the ECB has missed the proverbial window when it comes to normalizing policy. The monthly, price insensitive bid that was keeping a lid on sovereign borrowing costs and capping credit spreads is now history and we’re left to lean on reinvestments and the “stock” effect (i.e., the presumed risk-asset-supportive effect of the sequestration of assets on the central bank’s balance sheet).

All of this probably argues for fiscal stimulus and if the data continues to come in weak, prompting calls for expansionary fiscal policy akin to that which is being pushed in Italy (against the will of Brussels), it will pile pressure on the “establishment”/”status quo” camp ahead of the European Parliament elections.



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