Germany has become a weak link for the Euro area economy

This morning has focused our minds again on what has been one of the economic developments of the past eighteen months or so. This is the turn in the trajectory of the German economy which has gone from being what the Shangri-Las would call the leader of the pack to not only a laggard but maybe contracting. So let us get straight to the news,

The German economy contracted in September,
latest flash PMI data showed, as the downturn in
manufacturing deepened and service sector growth
lost momentum. Job creation meanwhile stalled as
firms reported weakening demand and pessimism
towards the outlook for activity. ( Markit PMI )


If we start with this area then we have to address the fact that things were already really bad so that gives a perspective on the state of play. If we thought the worst was behind us then how about this?

September’s IHS Markit Flash Germany
Manufacturing PMI read 41.4, signalling the
sharpest decline in business conditions across the
goods-producing sector since the depths of the
global financial crisis in mid-2009. ( Markit)

The only time I can recall a series weaker than this was the Greek manufacturing sector which I recall going into the mid-30s back in the day as the economy collapsed, or if you prefer was rescued. I am sure that some there are having a grim smile at this turn of events although of course it will have side-effects for my subject of Friday.

The survey also tries to look ahead but that raises little hope and even adds to the gloom.

The survey showed a sustained decline in underlying
demand, with total inflows of new business falling
for the third month running and at the quickest rate
for seven years. Slumping manufacturing orders led
the decline, recording the steepest drop in more than
a decade in September,

If we switch to the official data we were told this earlier this month.

In July 2019, production in industry was down by 0.6% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In June 2019, the corrected figure shows an decrease of 1.1% (primary -1.5%) from May 2019.

As you can see there June was not as bad as thought only for the number to fall again in July meaning we can get some perspective from this.

-4.2% on the same month a year earlier (price and calendar adjusted)

This means that the index for industrial production is at 101.2 where 2015 = 100 which shows little growth and if we drop construction out of the numbers it falls to 99.5. So in broad terms what Talking Heads would call a road to nowhere. More specifically the seasonally and calendar adjusted figures peaked at 107.2 in May of 2018.

Also we see that the PMI numbers we looked at above are pretty consistent with the official orders data.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in July 2019 a seasonally and calendar adjusted 2.7% on the previous month…….

-5.6% on the same month a year earlier (price and calendar adjusted).


This has been doing much better than the manufacturing sector. But we already know from the numbers above that it has not pulled the manufacturing sector higher so the troubling question is whether it pulled the service sector down?

Growth of business activity in the service sector
slowed sharply since August to one of the weakest
rates seen over the past three years……..Flash Germany Services PMI Activity Index at
52.5 (Aug: 54.8). 9-month low.

Sadly the answer is yes.

though notably there was also a drop in service sector new business – the first recorded since December 2014.

You may not be surprised to learn that much of the trouble is coming from abroad.

Lower demand from abroad also remained a key factor, with both manufacturers and service providers reporting notable decreases in new export orders during the month.

Bringing everything together brought a new development for the Markit PMI series.

“Another month, another set of gloomy PMI figures
for Germany, this time showing the headline
Composite Output Index at its lowest since October
2012 and firmly in contraction territory.
“The economy is limping towards the final quarter of
the year and, on its current trajectory, might not see
any growth before the end of 2019″

That is significant for them as they have been over optimistic for Germany throughout this phase. They have recorded growth when the official data has showed a contraction. Also if we look back to the opening of last year they gave us numbers in the high 50s showing very strong growth whereas as I pointed out on the 20th of last month the reality was this.

Actually back then we did not know how bad things were because the GDP numbers were wrong as the Bundesbank announced yesterday…….In the first quarter, growth consequently totalled 0.1% (down from 0.4%), while it amounted to 0.4% in the second quarter (after 0.5%).

In some ways it is harsh to point this out because the official data series was wrong too but the PMIs were also more optimistic than what we thought the numbers were then, and sadly were overall simply misleading.


There has been an impact here this morning as Germany’s bond market has resumed its rally. The picture had been weaker for a while in an example of buy the rumour and sell the fact on ECB ( European Central Bank ) action. But today the ten-year yield has fallen to -0.58% and the whole curve has gone negative again with the thirty-year at -0.12%.So Germany is being paid to borrow at every maturity.


There are more than a few questions here and the Ivory Tower of the ECB has been instructed to look into the situation. From a Working Paper released this morning.

In the period from January 2018 to June 2019 the year-on-year growth rate of euro area industrial production (excluding construction) fell by 6.3 percentage points overall, from 3.9% to -2.4%. This is by far the largest fall recorded among major economies in that period……Among the largest euro area countries, the biggest declines were recorded by Germany (10.9 percentage points), the Netherlands (5.7 percentage points) and Italy (5.5 percentage points).

In a broad sweep what has been a long-running success for the Euro area which has been German production leading to the trade surplus has stalled and hit the brakes. Or as Markit put it.

The automotive sector was once again highlighted as a particular source of weakness.

As to the ECB it is looking rather impotent here. It has made its move with even lower interest-rates ( -0.5%) and more bond buying or QE but it was doing that when the German economy turned down at the opening of 2018. Also the hype about the new TLTRO and the issue of tiering for The Precious collapsed as the take-up was a mere 3.4 billion Euros.

Of course Germany could respond with fiscal policy. Here the outlook is bright as it has and is running a fiscal surplus and it would be paid to borrow. Yet it shows little or no sign of doing so. From time to time a kite is flown like the current one about more spending on renewable energy but then the wind stops blowing and the kite falls to the ground.

Meanwhile this morning’s monthly report from the Bundesbank seems rather extraordinary.

Moreover, from today’s vantage point, only a slight decline in GDP is to be expected overall, even including the second quarter. “Such a decline should currently be seen as part of a cyclical return to normality as the German economy emerges from a period of overheating,” according to the experts.








17 thoughts on “Germany has become a weak link for the Euro area economy

  1. Excellent soundcloud Shaun. So much USD cheap borrowing in past decade (remember Swiss franc mortgages) may have future impliction?!? The collective blog discussion of this days ago pointed out the rising storm in the repo market (only on this blog). I wish the Ivory Towers (Fawlty?!?) would occasionally admit you’re right!!! So cash for clunkers time in Germany?!?

  2. hello Shaun,

    re: “The economy is limping towards the final quarter of
    the year and, on its current trajectory, might not see
    any growth before the end of 2019″

    I know people don’t like to be told but a green economy is one without growth. It has to be, there’s no such thing as sustainable growth – that’s an oxymoron.


    • Hi Forbin

      I saw a supporter of green policies in Twitter earlier making that point. I found it rather refreshing to be honest as he was being honest too about the consequences. Then the ordinary person can choose what to support with a better understanding of the choices ahead.

      • It’s difficult to argue against Green as a objective, as the Americans say – it’s motherhood and apple pie.
        But, it is the most expensive option. And so, like taking in each other’s washing, won’t the increased costs of a green economy increase GDP, Shaun?
        As always I could be wrong.

  3. Hello Shaun,

    another point is this. If Germany catches a cold – what future for the Euro ?

    I expect some “innovative ” financial jiggery – pokery to be done!

    fascinating 😉


    • That’s why Christine Lagarde got the ECB job. Indeed the PR campaign is already underway…

  4. Bundesbank been on the juice again?
    Grim laugh more like it! What did they expect? So Germany will be paid to borrow more to pay for more useless windmills? What could possibly go wrong!
    Don’t know why I’m laughing though. French nukes have a ‘welding problem’ on the boilers. Probably lead to months of sets being taken down. Likely to hit power exports to both UK and Germany. Better pray for a mild winter with wind, otherwise its going to get dark.
    Sunny gas-fired Florida here I come.

  5. ah so Germany needs a Labour government

    “A government run by Labour Party will mobilize financial resources on a scale not seen since the reconstruction of Britain after World War Two ”

    they could but will they ?


    • Hi Forbin

      Not if we remain as it would be against the Growth and Stability Pact. Whilst we are not Euro area members it does apply.

      “This procedure begins with a Member State:

      either having breached or being in risk of breaching the deficit threshold of 3% of GDP

      or having violated the debt rule by having a government debt level above 60% of GDP, which is not diminishing at a satisfactory pace. This means that the gap between a country’s debt level and the 60% reference needs to be reduced by 1/20th annually (on average over three years)

      In determining whether a numerical breach should lead to the opening of an EDP the legislation specifies how all relevant factors should be taken into account.”

  6. Oh dear, who is going to support the rest of Europe now, if the Godmother has fallen on hard times.
    Shaun, with recent talk on, the ” B” word, not Boris, there has been little comment our present and future financial commitment to the EU in terms of support to there banks – have you the figures

    • Hi Foxy

      So much of that is undefined as the initial liquidity support can depend on the currency the problem is in. So for example Deutsche Bank could go to the US Federal Reserve. What we would be leaving is the EFSM where we backed some of the help to Portugal and Ireland in the Euro crisis.

      However in a crisis we might provide help to our friends and we have had close ties with those two countries in the former case it is England’s oldest ally and in the latter there are so many ties with Ireland.

      So the longer answer is that the formal ties would go but informal ones would remain.

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