German recession fears grow with latest industry data

Angela Merkel at WEF

Fears that Germany is on the brink of recession intensified after the eurozone’s largest economy suffered its biggest slump in industrial output since the beginning of the financial crisis.

The Germany economy contracted in the second quarter and economists believe it will have struggled to grow in the third or may possibly have shrunk again. Concerns that it could have entered technical recession – defined by two consecutive quarters of contraction – were fanned by news on Tuesday that industrial output in August slumped 4%. That was more than twice the decline of 1.5% that had been forecast by economists in a Reuters poll.

The drop was the biggest since January 2009, underlining the fact that, more than five years on from the financial crisis, Europe’s biggest economy is still struggling to shake off the damage done by recession.

The German economy ministry sought to highlight the effect of later summer holidays, which boosted July, but admitted there was also underlying weakness.

“Industrial production is currently going through a weak phase ... but the current decline is exacerbated by holiday effects,” the ministry said in a statement alongside its data.

“All in all, one should expect weak production for the third quarter as a whole.”

The disappointing figures follow data on Monday showing German industrial orders plunged in August, again by the biggest amount since 2009. That news of weak demand raised fears about not only the summer but the closing quarter of the year, too.

“Another shocker” was how Carsten Brzeski, economist at ING Financial Markets described the latest numbers on output.

“The sharp drop in August could at least be partly driven by the vacation period. However, the drop is too strong to explain it by one-offs. This means that increased uncertainty but also real slowing of the eurozone economy, Eastern European economies and emerging markets are all currently taking their toll on the German economy,” he said.

“The short-term outlook for the economy is very diffuse as the strong labour market and solid private consumption should be able to, at least partly, offset weaker industrial activity. Whether this will be enough to avoid a technical recession, i.e. another contraction in the third quarter, is with today’s industrial production numbers too early to tell. Looking beyond the third quarter, the German industry is looking into a more difficult future.”

Economists said the latest signs of weakness in the eurozone could well prompt more calls for the European Central Bank to step up action to revive the region.

Faced with the threat of deflation and tumbling business confidence as the Ukraine crisis continues, the ECB has already cut lending and deposit rates and announced a programme to buy asset-backed securities. But it has so far stopped short of embarking on full-scale quantitative easing (QE) which would potentially involve the bank purchasing government debt.

Christian Schulz, senior economist at the German bank Berenberg, said talk of all-out QE could soon return.

He said the continued decline in German industrial production confirmed his expectation that GDP “will probably not grow much in the second half of the year”.

“A significant rebound in manufacturing and thus investment is unlikely to come through before early 2015. That could force the ECB to revise down forecasts again in December and trigger a new debate about more easing measures, including US-style purchases of sovereign bonds,” Schulz said.

Powered by Guardian.co.ukThis article was written by Katie Allen, for The Guardian on Tuesday 7th October 2014 11.44 Europe/London

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