Where German manufacturing seemed to be heading into a sharp recession a few months ago, the wind has died down for a while. In August, German industry rose 0.3%.
It was expected that German manufacturing would show another decline (of around -0.1%), but that turned out not to be the case. The 'good' result ensures that fears of a new economic crisis have subsided somewhat. Manufacturing output rose 0.7%, offsetting the 0.6% drop in July, while production output contracted 1.5%. On an annualised basis, industrial production fell 4%, unchanged from July.
Still, according to ING, there is no reason to get overenthusiastic. "Manufacturing output is always volatile in the summer months, so September will be a more important indication to assess whether there really is a trend reversal and an improvement in manufacturing," he says. The fact that industrial orders also slowed in August also gives little hope for a turnaround. Moreover, the September buyers' index shows that new orders dropped the most since April 2009, leading to a further backlog of work. "We are therefore talking about a trough in industrial production at best, but a real recovery seems a long way off," he said.
Concerns
In particular, the fall in export orders, one of the main culprits of weak output, suggests that German manufacturing remains extremely sensitive to further developments in the trade war. Recent events do not bode well, such as the WTO's permission for the US to impose €7.5 billion in tariffs on European goods to offset illegal subsidies from Airbus. "These tariffs take effect from 18 October. At the same time, the US could still decide to impose tariffs on European cars in November, which would be especially damaging for German industry. And, of course, there is still the risk of a disorderly Brexit, which is not yet off the table."
Fiscal stimulus
'As long as global trade stagnates, German manufacturing and subsequently the entire German economy will almost certainly languish,' ING writes. "Now that monetary policy has reached its limits, economic support should take precedence over fiscal policy." One advantage, according to ING, is that this is no longer a taboo subject in Germany. "Germany's business lobby, the FDI, has called on the government to abandon its balanced budget rule, a recommendation that is further underlined by the five leading research institutes. We expect that an additional fiscal stimulus can be given early next year, paving the way for an economic recovery during 2020."
Source: think.ing.com
