Retail sales are falling sharply. Industrial production is slumping. Construction is sluggish and the government is weak and clueless with little idea of how to respond to falling demand. No, don’t worry, you haven’t accidentally stumbled across a hardcore remoaner rant about a declining, irrelevant Britain. That is actually a description of what is meant to be the eurozone’s strongest economy – Germany. Very few people seem to have noticed it yet but there are worrying signs the exporting powerhouse at the centre of the eurozone is slowing down sharply. True, it might only be a blip. Then again, that is how most recessions start. If that is what is happening, and the evidence is mounting all the time, then it will be catastrophic for the whole single currency area. No progress has been made on reform, policy responses are limited and electorates are exhausted by austerity. One more downturn might be the last. Most mainstream economists have bought into the story that the eurozone is booming this year. Led by a powerful Germany, with France reviving under president Macron, and with a central bank that is still pumping the economy with printed money and near-zero interest rates, production has been rising and joblessness finally falling. Heck, even Italy and Greece have been growing again. Investors have been pouring cash into the continent, and the currency has been soaring, as anyone planning a holiday in France or Spain will quickly discover.
But hold on. There are some suspicious numbers emerging that don’t quite fit that narrative. Start with Germany. This week we learnt retail sales dropped by 0.7pc in February. They have fallen in six of the last eight months and all of the last three. On Friday, industrial production figures showed output down by 1.6pc, the largest monthly fall in three years. Factory orders came in way below expectations this week, with a mere 0.3pc rebound after the 3.5pc drop in January, and construction spending is also down. In fact, the only part of the German economy still expanding is its export industry, but even that is under threat. At the same time, Angela Merkel’s patched-together Grand Coalition seems unlikely to respond with any form of stimulus, while Germany will be the biggest loser from Donald Trump’s trade wars. True, employment growth is still OK (although rather like this country, nearly all the new jobs go to lowly paid immigrants). But that is not a leading indicator like retail sales and factory output. “We are not calling for a recession in Germany … yet”, argued High Frequency Economics in a note this week. “We are suggesting that the peak of economic growth for this cycle has been realised.” Once you are passed a peak, of course, then the only way is down. Across the eurozone as a whole, the outlook is not looking much better. Retail sales for the whole region rose a mere 0.1pc in February compared to the 0.5pc forecast. France is especially weak, with retail stagnant, and a nasty 1.9pc fall in household real income for January and for the year as a whole. A long summer of strikes is not going to help that economy, especially as its huge tourist industry needs the trains and planes running again to prosper. Over in Italy, there is at least some growth, which is a miracle given its experience of the single currency, but the jobs numbers came in below expectations this month. None of those figures fit the picture of an economy that is booming. In fact they look increasingly like one that is heading into a German-led downturn. In truth, the growth of the last two years has been mostly an illusion. The European Central Bank has chucked 2.2 trillion of freshly printed euros at the economy and slashed interest rates as close to zero as it can possibly get. It would be extraordinary if that amount of cash didn’t stimulate some kind of revival. But the key question was always this: would quantitative easing kick-start a genuine recovery, as it has in the United States, or to a more limited extent in the UK? Or would it, as it has in Japan for 20 years, merely generate a feeble revival that almost immediately runs out of steam? Right now, it is starting to look as if we have the answer. The eurozone is another Japan. After all, without a strong Germany, the region can’t grow. It accounts for 23pc of the zone’s GDP and has created 38pc of the new jobs in Europe over the last five years. And Germany has stopped expanding. The last recession led to a dramatic crisis within the eurozone. Greece, Ireland and Portugal had to be bailed out, and Spain and Italy came within a whisker of the same fate. The next one will be far harder. There have been no meaningful reforms to make the single currency work better. Indeed, in the background, the imbalances have grown even worse, with Germany’s shocking trade surplus draining demand from the rest of the continent. The ECB is out of policy responses. The banking system looks in worse shape than ever (suspiciously, Deutsche Bank’s shares keep hitting fresh lows – almost as if something was up in its home market). In the peripheral countries, voters are exhausted by austerity and low growth. In the core, Angela Merkel now looks too weak to impose a solution should a fresh crisis erupt. In truth, a fresh recession may well be terminal. Of course, it may not happen. The latest data may just be a few rogue figures, followed by a swift recovery as most mainstream forecasters still predict. Even so, the warning signs are clear enough. The markets are ignoring them right now. But that doesn’t mean they aren’t real – and if they are the eurozone is heading for big trouble.
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