The only saving grace for Mario Draghi when it comes to the latest read on the state of Europe’s largest economy is that it comes on Friday, rather than Thursday, which means nobody has to talk about it on camera.
Optimists on the euro-area have generally hung their hats on the services sector this year as evidence of a deep manufacturing slump continues to pile up. On Friday, the latest IP data out of Germany showed industrial production diving 1.9% MoM on April, the most in (nearly) four years and considerably worse than consensus, which was looking for a 0.5% drop. Meanwhile, exports were -3.7% in April, again missing estimates (-0.9%) and coming in below the low end of the range. Imports fell a seasonally adjusted 1.3%.
This comes a day after a somewhat bewildering ECB meeting, that found Mario Draghi lifting inflation and growth forecasts for 2019, lowering them for 2020, extending forward guidance and unveiling kinda/sorta generous TLTRO terms. The waters were muddied further still when Draghi mentioned there was some discussion of rate cuts and that, despite deflation not being the base case, the ECB has room for more QE if necessary.
“Despite easing yesterday with an extension of forward guidance and relatively generous TLTRO terms, the ECB did not quite deliver with the urgency the market was looking for”, Goldman said Friday. For their part, BofA wasn’t particularly impressed with the way the whole thing was orchestrated. After noting that the forward guidance and TLTRO terms were appropriately dovish, the bank weighed in on the press conference as follows:
The implicit message was that the ECB is insufficiently concerned about the outlook and inflation expectations. After that, Draghi had to use the press conference, as we expected, to argue that all instruments remain available if any contingencies materialise. He went even further. He tried to show there is still ample room for all tools – whether cuts or more QE. But arguing that everything is available and showing you can build consensus to deliver are two different things. We remain worried.
Ultimately, it’s not entirely clear that the ECB can do much more and Draghi simply didn’t do enough in the press conference to convince anyone that rate cuts and a restart to QE are plausible, let alone imminent.
Read more: Draghi Leaves The Bazooka In The Box
Friday’s data out of Germany points to continuing weakness and ongoing drag from trade tensions. “The drop in core industrial output was even more pronounced (-2.5% m/m) driven mainly by weak dynamics in industries exposed to global demand slowdown, particularly automotive, metals and machinery & equipment”, Barclays wrote, adding that “today’s IP outturn echos the latest survey data suggesting that industrial activity will likely cool down by the end of H1.”
Ultimately, Barclays slashes their Q2 growth outlook for Germany 10bp to 0.2% QoQ. Friday’s data comes on the heels of a rather unnerving (if anomalous) unemployment print for May, which showed the number of people out of work surging by 60,000, versus estimates of a decline of 8,000. Late last month, the latest read on Ifo business confidence came in at 97.9, the lowest since 2014.
All of this as the threat of auto tariffs continues to cast a pall over the outlook for Europe and as the Sino-US trade dispute continues to weigh on China’s economy, something that matters quite a bit for the Germans.
Oh, and don’t forget about an increasingly fractious domestic political backdrop – Germany now has that “going for it” too.