Germany on Brink of Recession as Factories Slump -- Update
September 23 2019 - 10:00AM
Dow Jones News
By Paul Hannon in London and Tom Fairless in Frankfurt
Germany's economy is on the brink of recession, reflecting the
deepening hit to its factories from the U.S.-China trade war,
uncertainty around the U.K.'s departure from the European Union,
and problems in its key automobile sector.
A survey of purchasing managers released Monday showed signs
that weakness is spreading to Germany's services sector, which has
seen robust growth over recent quarters even as manufacturing
output has declined. That could turn a mild downturn into a deeper
and more prolonged contraction, dragging down growth in other parts
of Europe.
The slowdown in Europe's largest economy has been led by its
manufacturing sector, which is heavily dependent on exports and has
been hit by weakening demand from the U.K., China, Turkey and
elsewhere over the past year.
In September, the sector experienced an even sharper
contraction, as its purchasing managers index slumped to 41.4 from
43.5 in August, hitting its lowest level in more than a decade. A
reading below 50.0 points to a decline in activity.
In responses, the euro fell 0.4% against the dollar and the
yield on the German 10-year bund dropped to minus 0.585% as
investors reached for safe government bonds. The Stoxx Europe 600
fell 0.9% in morning trade, with the banking and autos sectors each
down 2.6%.
"The manufacturing numbers are simply awful," said Phil Smith,
an economist at IHS Markit, which compiles the PMI. "All the
uncertainty around trade wars, the outlook for the car industry and
Brexit are paralyzing order books."
Germany's economy contracted in the three months through June
and appears set for another drop in output in the third
quarter.
Germany's economic woes helped persuade policy makers at the
European Central Bank to launch new stimulus measures this month,
including the resumption of a bond-buying program.
By contrast, Germany's central bank appears less troubled by the
downturn. In a statement Monday it acknowledged that the economy
has probably entered a recession, but described it as mild and said
it "isn't in itself a cause for concern." Both of Germany's
representatives on the ECB's decision-making body opposed the
stimulus measures.
The survey of purchasing managers doesn't offer much hint of a
rebound over coming months, with manufacturing orders continuing to
fall sharply.
There were also signs that the services sector is on a similar
trajectory. The PMI for the services sector hit a nine-month low in
September, and the composite PMI -- which measures total business
activity -- fell to 49.1 from 51.7 in August, reaching its lowest
level since October 2012.
"It remains open whether the industrial sector will recover
before the weakness spreads to other sectors of the economy," the
Bundesbank said.
In testimony to European lawmakers Monday, ECB President Mario
Draghi again urged Germany's government to increase spending and
cut taxes to boost activity and stave off a recession.
"Governments with fiscal space that are facing a slowdown should
act in an effective and timely manner," he said. "The longer the
weakness in manufacturing persists, the greater the risks that
other sectors of the economy will be affected by the slowdown."
The German government has a budget surplus, but is reluctant to
loosen its purse strings, arguing it must prepare the country for a
rise in pension and health care costs as its population ages.
"Even with its economy stuttering, we think a large structural
German stimulus is still unlikely given the politics," said Simon
Wells, an economist at HSBC.
IHS Markit said its measure of activity for France also declined
in September, reaching a four-month low as the manufacturing sector
stagnated and the services sector weakened.
Across the eurozone as a whole, the composite PMI fell to 50.4
from 51.9 in August, indicating that activity was close to
stagnation. It was the weakest reading since June 2013, when the
eurozone economy was in the throes of a twin government debt and
banking crisis.
Caitlin Ostroff
in London contributed to this article.
Write to Paul Hannon at paul.hannon@wsj.com and Tom Fairless at
tom.fairless@wsj.com
(END) Dow Jones Newswires
September 23, 2019 09:45 ET (13:45 GMT)
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