Germany Approaches Recession As Factory Output Hits Decade Low

The German manufacturing sector has been hit with the worst downturn since the Great Recession, raising alarms that the largest eurozone economy is heading toward a new financial crisis.

Trade tensions between the US and China, as well as an ever-more-probable hard Brexit, are pushing the German economy down, as its Purchasing Managers Index fell to 41.4 from 43.5 last month. According to a monthly report by IHS Markit, growth in services also softened and there were further signs that the labor market has been taking a hit.

“With job creation across Germany stalling, the domestic-oriented service sector has lost one of its main pillars of growth,” said Phil Smith, principal economist at IHS Markit. “A first fall in services new business for over four-and-a-half years provides evidence that demand across Germany is already starting to deteriorate.”

The gloomy sentiment was shared by Simon Wells, chief European economist at HSBC. “Today’s PMIs make grim reading, particularly for Germany. Since the peak of the German manufacturing PMI in December 2017 there have been a few occasions where signs of stabilization have been snuffed out,” said Wells. “The latest falls have added a new leg down after a period of relative stability since the end of the first quarter. With the PMIs now signalling a deeper German manufacturing contraction and increasingly showing the manufacturing sector infecting the service sector, the risk of outright German recession is high.”

These bad omens are not only worrying for Germany, but for Europe as a whole, since the continent’s economy is tightly connected to the strength of German export business. The euro fell 0.3% on September 23, dropping below $1.10 as European stocks declined more than 1%.

“Today’s figures confirm one thing in any case: There will be no noticeable improvement in the economy this year,” said Ralph Solveen, economist at Commerzbank. “On the contrary, the risk of a recession is increasing.”

The European Central Bank cut interest rates to historic lows earlier in September and introduced a package of stimulus measures to boost growth, but its president, Mario Draghi, confirmed on September 23 that the bank stands ready to cut rates again.

“We have seen the labor market losing momentum,” Draghi said at his last hearing at the European Parliament before his eight-year term ends next month. “The growth outlook has been constantly deteriorating.”

Most economists are skeptical that ECB’s approach will do much to restore lost growth, and the loudest opponents of the additional interest cuts are Germans themselves, who believe their citizens are hurt most by lower rates.

“The ECB is right to keep an accommodating policy stance, but its recent package will not make much difference and certainly won’t help the German car sector,” said Dirk Schumacher, head of European macro research at Natixis.

Klass Know, head of the Dutch central bank, shared a similar sentiment, saying that low interest rates are becoming a “quasi-permanent phenomenon,” with negative side-effects such as rising house prices and falling pensions.