One Day, Things Will Turn Around For Germany – That Day Isn’t Today

On Wednesday in, “Horrible Slump In European Auto Market And Grievous Cut To German Growth Outlook Are Things That Don’t Matter, Yes?“, we talked at length about the rather glaring discrepancy between a series of dour economic data points and the blistering rally in the European autos and parts index.

Europe has been on the frontlines of the global economic deceleration and Germany’s current malaise presents a clear and present danger, not just to the bloc, but to the rest of the world – although Germany could very plausibly argue that if everyone else would get it together, the German economy would be just fine.

Whatever the case, market folk are interested in Europe these days and on Thursday, PMIs suggested the bloc’s manufacturing slump has not abated, although mercifully, it doesn’t appear to be getting worse anymore either.

German manufacturing remained in contraction territory in April, with the flash read on the BME/IHS Markit gauge barely bouncing from 44.1 in March to 44.5 this month. That was below consensus (45). Do note that the gauge was sitting at 58.1 just a year ago.

What you see in the red box is a truly nauseating slide. Admittedly, I should probably start using skinnier lines on my Excel charts, but as you can see, April’s “bounce” doesn’t even show up. Particularly troubling is this bit, from the release:

The drop in manufacturing order books in April was led by a further steep decline in new export orders, which fell at the second-fastest rate in the past ten years. Anecdotal evidence highlighted weak demand across the automotive sector in particular, whilst also suggesting some hesitancy among UK-based clients.

In other words, external demand is still weighing heavily – in that regard, recent data out of China is a veritable godsend for Germany, but it’s probably going to be a while before Beijing’s efforts to turn things around in the world’s second-largest economy start filtering down to the world’s fourth.

The flash read on Germany’s composite gauge was 52.1, slightly better than expected, although new orders remained in contraction territory for a fourth consecutive month. Services are still doing ok, though. The flash number for April on the non-manufacturing PMI was 55.6, versus consensus of 55.

“The overall picture for Germany’s private sector has changed very little according to April’s flash data, with strong growth across the services economy continuing to counteract the export-led weakness in manufacturing”, Phil Smith, Principal Economist at IHS Markit, said, adding that “though the PMI has ticked up from March’s 69-month low, it’s merely signaling the same modest rate of underlying growth as seen on average over the opening quarter of the year.”

It’s not hard to spot the moment when the German PMI data crossed the tape.

As noted in the linked post here at the outset, the German government slashed their outlook for growth to just 0.5% in 2019 on Wednesday.

Meanwhile, the flash April reading for France’s manufacturing gauge printed 49.6, a tick lower than March and the worst reading since August of 2016. That’s the second month of contraction. France’s composite gauge moved higher to 50 in April (toeing the line between contraction and expansion), but new orders were underwater (so to speak) for the fifth consecutive month.

At broader level, the flash read on manufacturing activity in the eurozone printed 47.8, below estimates and in contraction for a third consecutive month. The new orders gauge there has been mired in contraction territory for seven straight months. The composite read was 51.3, worse than consensus, although new orders rose to 50.6, the highest since December. Here’s the big picture:

“The eurozone economy started the second quarter on a disappointing footing, with the flash PMI falling to one of the lowest levels seen since 2014″, Chris Williamson, Chief Business Economist at IHS Markit said. “Manufacturing remained the key area of concern, with output continuing to contract at one of the fastest rates seen over the past six years.”

To roll out a familiar refrain, if you’re one of those people who subscribes to the old “it’s always darkest before the dawn” adage, well it’s pretty dark right now in Europe in terms of manufacturing activity. The numbers and anecdotes out of Germany continue to suggest that external demand has yet to rebound and also that concerns are particularly acute in autos, in line with slumping euro-area car registrations and ongoing weakness in China’s auto market.