Horrific data from Germany. Will a recession take place?

08.01.2019 12:13|Marcin Lipka

"In November, industrial production in Germany fell the most in a decade. Other data from the German economy also show a significant downturn and even a real threat of recession. Macroeconomic publications from Germany are extremely bad news for Poland," writes Marcin Lipka, Conotoxia Analyst.

For several months now, the German economy has been clearly failing. In the third quarter of 2018, the GDP declined by 0.2 per cent quarter-on-quarter, and there has been weak growth at 1.2 per cent year-on-year. The German Central Bank (Bundesbank) justified this fact mainly with regulatory issues in the automotive industry, which temporarily halted production in this sector.

Unfortunately, there are many signs that Germany's problems are not temporary and limited only to the new exhaust emission standards. Although the German economy is one of the best managed in the world, the problems may be much more severe than previously thought.

Breakdown observed in production. The worst since the great recession

The data on industrial production for November can be described as a drama, which was published on January 8th. It dropped by 4.7% year-on-year, i.e. the most since the end of 2009. Sometimes it happens that such strong, sudden falls are caused by one-off factors, seasonal disturbances (weather, number of working days) or a clearly negative contribution, e.g. from the energy sector. This time, however, fatal data cannot be justified by any extraordinary events. Why?

First of all, the negative trend has been evident for several months now. At the turn of 2017 and 2018, production grew at a pace of approx. 6% per year. However, since the middle of last year it has been fluctuating close to 0. Now the negative trend has simply accelerated.

The upcoming problems of industrial production starting from June last year suggested negative year-on-year orders in manufacturing. Their 5-month year-on-year average is at the level of minus 2.5% after five consecutive negative readings (in November it was minus 4.6%).

It might also be worrying that the slowdown in production is spreading to all key components. Negative dynamics were observed in the mining, construction and energy production sectors, as well as in the most important component, i.e. manufacturing production (a drop by 4.8% year-on-year). Also in the division into consumer goods and capital goods, only negative readings can be seen.

The weakness of the second half of the year in the German industry is also proven by the fact that the production index (seasonally adjusted and by the number of working days) is now at the level of early 2017. This means that a year and a half of strong growth (beginning of 2017 - middle of 2018) was lost in just 5 months (July - November 2018).

Bundesbank forecasts. Sorrowful laughter

Jamie Murray, head of European Bloomberg Economics, in today's commentary on data from Germany suggested that the decline in industrial production in the entire fourth quarter may cause a decline in GDP in the last quarter of last year at the level of 0.3% q/q. This would mean that the German economy would see a technical recession (two consecutive quarters of GDP decline).

This forecast seems to be too pessimistic, especially as retail sales in Germany are still growing. However, this does not change the fact that 2018 (especially the second half) was a terrible year for the largest economy in the eurozone.

Bundesbank's forecasts from mid-December last year may also be called a failure. Three weeks ago, the German central bank estimated growth at 1.5% in 2018. Now even half of this value (0.7-0.8%) will be a success, which means that last year was the worst year for Germany since the eurozone debt crisis. Earlier, however, it was expected that last year could be one of the best in the past decade (the European Commission's projections from winter 2018 assumed an increase for Germany at 2.3% last year).

Bad information for Poland

Apart from issues related to the automotive industry, data from Germany also show that the trade war between USA and China has a negative impact on the sentiment of enterprises and reduces their demand for capital goods, both globally as well as in Europe.

Events in Italy also have a negative impact on the eurozone's condition, where the months-long battle with the European Commission and harmful ideas for fighting 20 years of economic stagnation are destroying the already imperfect EC tools for enforcing the basic Community fiscal rules. The protests in France and the inadequate reaction of the authorities in Paris also had a negative impact. On top of this is Brexit, which increases risks not only for the United Kingdom but also for the European Union.

All this information suggests that the future prospects for the Polish economy are deteriorating significantly due to its links with Germany and the eurozone as a whole. How much? It is difficult to say because due to high consumption and investments co-financed by EU funds, the basic indexes can be relatively strong for a relatively long time. However, there is growing risk this year after an excellent 2018 economic situation, and the second half of the year especially will be much weaker than shown by most forecasts.


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