The German economy in July 2019 – Recession ahead?

Returning from the summer holidays, the German economy does not look any better than in the previous month (here). The German GDP showing a (mild) contraction in the second quarter (cf. below), proves right the gloomy outlook of this post since September of last year (here). But, let’s look into it in some more detail:

The “Wall of Worry” is one picture richer: What everyone knew already is now official: German GDP shrank by 0.1% in the second quarter of 2019 (here), i.e. two of the last four quarters were officially negative and one has been prescribed an official “0.00%”. Germany is thus the worst performer in the EU, at least in terms of economic growth (here). And also the prospects for the third quarter are not exactly on growth, (here) – so is the recession imminent now? Indeed, it seems.

After a rather bumpy ride, the German DAX seemed to sense the incoming bad economic data and took a negative turn in July 2019: After closing at 12,398 points on 28 June 2019, the index reached its peak with 12,629 already on 4 July before losing 209 points (over the whole month) and ending at 12,189 points (here).

German exports – at first sight – seem to have caught the volatility virus: While growing by 1.1% on a MoM-basis and even by 4.5% on a YoY-basis in May 2019, the actually cratered in June, with a small decline (-0.1%) on a MoM-basis, but 8.0% on a YoY-basis. What a shocker!?! No, rather I would qualify it as another statistical glitch, as the Spiegel reports, exports indeed shrank in the 2nd quarter 2019 in total, but not as steep as the last figures suggest. This decline in exports seemingly directly translated into the German Target 2 balance which lost the galactic amount of Euro71 Billion and fell from Euro 942 Billion in June to roughly Euro 871 Billion in July 2019. The German inflation-rate rose from 1.6% (YoY) in June to 1.7% in July 2019.

The free-fall in Germany’s industrial production in the last months has again accelerated, if only a little, when registering a small gain of 0.3% (MoM) but still a YoY-decline by -3.7% in May 2019. Overall, this decline of the once mighty German industry becomes frightening: December 2018: -0.4% (MoM) / -3.9% (YoY), January 2019: -0.8 (MoM) / -3.3 (YoY), February: +0.7 (MoM) / -0.4 (YoY), March: +0.5% (MoM) / -0.9% (YoY); April: -1.8% (YoY), -1.9% (MoM), May: 0.3% (MoM), -3.7% (YoY).

As a slight ray of hope, German industrial orders reversed the trend of the last months and booked (at least on a MoM) basis a rise of 2.5% (MoM), but a decline of another 3.6% on a YoY-basis (against -2.2% (MoM) and even -8.6% (YoY) in May 2019). So, the decline in production might come to an end in the third quarter. We’ll see.

Due to the holiday season, German unemployment-rate increased by 59,000 (MoM), but decreased by another 49,000 on a YoY basis to now 2.275m unemployed, the unemployment rate rising from 4.9% in June to 5.0% in July 2019. In its accompanying press release, the Bundesagentur für Arbeit points out that the number of job offers stagnates – though on a high level. Given these comments, it seems likely that Germany will see an unemployment rate again above 5% in the coming winter if a recession cannot be averted.

In a reversal of previous trend, German corporate insolvencies rose by 3.3% (YoY) in May 2019 (after a freefall of the previous months: (-11.5% (!) in March and 3.2% (YoY) in April 2019). Given the dismal economic data it seems likely that at least in the coming winter the figures will substantially rise.

While in the previous months, the leading German sentiment indicators were not in sync in, they now are – and all point to a contracting German economy: the German (Industrial) Purchasing Managers’ Index (PMI) decreased from 45.0 points on 1 July to 43.2 points on 1 August 2019. Also, the ZEW Indicator, after 7.8% in June, with a loss of 8.9 points and an indicator level of minus 1.1 points in July 2019, this indicator falls below the zero line again for the first time in a good nine years. The Ifo business climate index, too, resumed its declining path and fell from 97.5 in June (Revised value due to seasonal adjustment) to 95.7 in July 2019 (April: 99.1 points; May: 97.9 points; June: 97.4%).

To sum up: With the – important – exception of industrial orders (and the target2-balance) all indicators to the German economy point south. And even the industrial orders – after several months of decline – come from a too low a base as to be able to infer a growing economy from this figure alone. Hence, the path to a “technical” recession (meaning two consecutive recessionary quarters) seems to be “cleared”. The mother of all questions is now, which impulse would be able to break this downward trend and create growth. Central banks? I begin to doubt it, given the non-lasting effects of the Fed’s first rate-cut in the previous month. So, a recession might indeed be unavoidable.

CU next month!

Volker Beissenhirtz

Leave a Comment