The Economist - USA (2019-09-28)

TheEconomistSeptember 28th 2019 65

1

“S

imply awful”is how Phil Smith of

ihsMarkit, a data provider, describes

the latest survey reading of Germany’s

manufacturing output. For months the

purchasing-managers’ index has lan-

guished below 50, indicating contraction.

An early release published on September

23rd showed it had slid to 41.4, signifying

the sharpest decline in manufacturing ac-

tivity since 2009. The services sector also

lost momentum—for the first time in over

four years, managers said they were win-

ning less new business.

A slowdown in Germany’s economy

that started a year ago was initially expect-

ed to be short-lived. But the gloom has

deepened. Output shrank in the second

quarter, and many economists, including

those at the Bundesbank, think it is still

contracting—satisfying the definition of a

recession. As a consequence, the euro zone

seems set barely to grow.

Global trade has moderated, and with it

industrial activity across Europe. The con-

tinent has suffered collateral damage in the

trade war between America and China. But

there are other reasons for its woes. Take

Germany’s exports to both countries, for

instance. Carsten Brzeski of ing, a Dutch

bank, points out that these have held up

better than exports to other markets.

Brexit-related uncertainty means that ex-

ports to Britain have taken a bigger hit.

Even so, researchers at the European Cen-

tral Bank (ecb)find that external causes ex-

plain only around a third of the decline in

the euro zone’s industrial production over

the past year. The rest of the trouble origi-

nates within the currency union.

Much of it appears to stem from supply

disruptions in Germany. Its manufacturing

sector has taken a much more severe beat-

ing than those of France, Italy or Spain (see

chart 1). Oliver Rakau of Oxford Economics,

a consultancy, reckons that stalling car

production alone explains nearly half of

the fall in Germany’s industrial output in

the second quarter. Once the effects on the

rest of the supply chain are added, it might

explain as much as three-quarters. Dis-

tracted by the fallout from the emissions-

cheating scandal, and by new emissions-

testing procedures, carmakers delayed

production and postponed new models.

Surveys suggest that European demand

for cars is holding up well. Mr Rakau thinks

that Germany’s carmakers should recover

market share as they launch new models in

the autumn and work off a large backlog of

orders. But the risk is that the country’s

auto giants struggle to regain ground lost

to foreign competitors. Meanwhile, trade

headwinds could strengthen and fears of

protectionism could deter companies from

investing. Economists are downgrading

expectations for economic growth in 2020

in both Germany and the euro zone.

The silver lining so far has been that the

domestic economy was on an upswing.

Unemployment rates have returned to pre-

Europe’s economies

The dip deepens

Policymakers prayed the slowdown would be temporary. Instead it is intensifying

Wurst among equals^1

Source: IHS Markit *Based on a survey of purchasing executives

Purchasing managers’ index*,

compared with the previous month

2017 18 19

40

45

50

55

60

65

Germany

France

Manufacturing

contracting

↓

↑

Manufacturing

expanding

Italy

Spain

Finance & economics

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— Buttonwood is away