It was announced that new factory orders in Germany dropped 4.2 pct. in February compared to January. It sounds like a pretty serious downward move, and it is, especially because economists initially expected a small increase of +0.3 pct. It has to be said, that it’s a month-on-month comparison which makes the swings more volatile, which is often the case with this economic number.
Despite this risk of volatility, the development confirms Germany’s troubled situation. The yearly change in the new factory is even worse, with an 8.4 pct. free fall– the worst year-on-year performance since the global financial crisis. It reflects a particular bad development in February, though January was also revised further down to 2.1 pct.
Friday brought some hope back, as the yearly change in the industrial production for February showed “just” a minus 0.4 pct. change. But one should not forget that the development during November to January contracted into the deep red numbers. The “good news” from the February industrial production is largely due to a mild winter in Germany this year. The construction sector has hardly been disrupted by the winter, thus adding to higher activity compared to last year. The manufacturing sector continued its contraction, though only slightly. The export to United Kingdom is now getting hurt by the unsettled Brexit situation, but export to countries like China and Turkey suffers.
Because of the worrying data out of Germany, I am incredibly excited about the GDP growth in Germany in the first quarter of this year. It looks like the limited GDP growth, even including the second quarter, will solely be saved by the construction sector. Said in another way, without the positive contribution from the construction sector, Germany’s GDP growth this first half of 2019 would be dangerously close to zero pct.– in a situation with historically low unemployment.
Interestingly, just the fact that the United States and China are likely to settle their trade dispute seems to give many in Germany a feeling of relief. I am not convinced that this will change the prospects for the German companies significantly, including the GDP growth expectation.
The uncertainty affecting Europe from several sources has most recently had a surprisingly negative effect on the confidence among German consumers. But so far, retail sales have nevertheless increased to very positive levels in the first few months of the year. There are after all a few pockets of hope- meaning, growth in Germany still contains some positive elements, though consumers need to hang-in to save the economy.
Germany represents around 1/3 of the total GDP in the Eurozone, which naturally leads to a general worry on the Eurozone. My perception of the consumers in the Eurozone is also that they surprise by spending more money, which is good. The annual change in retail sales is actually slightly on the rise for the entire Eurozone. The yearly increase reached 2.8 pct. in February, which is the highest level for a long time. It is not exuberant, but it gives some sign of economic hope.
But when the European Central Bank (ECB) is to assess the state of the common economy within the Eurozone, I expect the central bank will focus more on corporations, especially the industrial sector in general, and the financial sector in Southern Europe.
The ECB is more than willing to re-introduce all possible monetary tools again, but I argue that even more monetary expansion won’t help businesses and the GDP growth significantly.
As usual, the cheap and abundant liquidity just keeps the Southern European financial sector out of trouble, so a new crisis is avoided right now. But the monetary policy does not bring new impulses and life to the economy in the Eurozone – I will allow myself to say that I am not surprised, though I am increasingly worried, because there are no solutions on the table.