“Economic development is rather fragile at the moment”, ZEW President Achim Wambach said Tuesday, after the release of a highly disappointing read on German sentiment.
To be sure, calling the trajectory of the German economy “rather fragile” is something of an understatement. The latest reads on factory orders and industrial output were a veritable disaster (no hyperbole needed – they were just that bad) and the economy stagnated in the fourth quarter.
Last year, it was the trade war and Brexit uncertainty that weighed on the outlook. Now, the coronavirus threatens to undermine the world’s fourth-largest economy thanks in no small part to its links to the second.
On Tuesday, the latest read on the ZEW survey showed expectations disappointing even the most dour estimates from economists. Expectations fell to 8.7 versus an expected 21.5, while the current conditions index printed minus 15.7.
What you’re looking at is the somewhat innocent-looking down-tick over on the right-hand side. Suffice to say it’s not as innocent as it looks, and it’s a bitter pill to swallow. The euro slipped on the news.
“The survey… provides a first glimpse into the potential European impact of the coronavirus, kicking off a week of crucial indicators that will culminate in PMI gauges on Friday”, Bloomberg’s Laura Cooper wrote.
This is the same story over and over again. The nascent bounce evidenced in some of the December and January data across global economies (occasioned by optimism around the Sino-US trade truce) is now in serious doubt.
I’ll leave you with this bit from Deutsche Bank which underscores the point in the German context:
Given Germany’s large exposure to global trade — despite an only meagre 0.9% real increase, exports (goods & services) accounted for 41% of GDP in 2019 — hopes in the industrial sector, where output has been falling for the last 1 ½ years, were pinned on a recovery in global demand. This has been evident in sentiment data, where the assessment of new export orders (PMI) has been rising by 11.4 points compared to its trough in Aug 2019, with the index level (49.6) suggesting at least a stabilization. More forward-looking export expectations in the ifo index have improved, too, although companies responded more cautiously in January already, with the balance of opinions receding from 2 (Dec) to 0.9. The change was most prominent in the capital goods sector , where the strong improvement in the export outlook (from -3.7 in Aug to 8.9 in Dec.) suffered a clear setback in Jan (3.8). As mentioned above, the survey periods of the ifo and the PMI surveys ended too early for the coronavirus to leave its imprint, so further corrections are probably on the cards.