Germany is not out of the woods - nor is China
Ambrose Evans Pritchard in the Telegraph Nov 14th
Germany has escaped recession but remains mired in industrial slump, leaving the country acutely vulnerable to China’s intractable woes and any further slowdown in global trade.
While Germany’s manufacturing sector has begun to stabilise after two years of contraction, this may not be enough to stop the gloom spreading to services and consumers over coming months.
The economy eked out 0.1pc growth in the third quarter but this was offset by revisions showing a deeper fall in the preceding quarter. In aggregate the German economy contracted over the six months to September.
Chris Beauchamp from IG said the market is paying more attention to the profit shock from Daimler as a gauge of global economic health in any case.
The blue-chip mother of Mercedes - the symbol of stability and Deutschland Inc - announced a €1.3bn retrenchment and a worldwide cull of 1,100 managers, warning that it will take two years to sort out the transition to electric vehicles and shake off the damage of the diesel scandal.
Daimler’s share price has dropped 40pc since early 2015. In a watershed moment, the company was overtaken this week by Tesla, its upstart US rival. Tesla’s $63bn market cap is now slightly larger.
There are tentative signs of recovery in Germany. The "second derivative” watched closely by traders and hedge funds has turned higher. The German Sentix and ZEW confidence indicators have rebounded. The Ifo Institute sees a “light at the end of the tunnel” for manufacturing.
Yet the slightest upset at this delicate stage would smother the green shoots. Much depends on China and Donald Trump’s trade reflexes. More than any other major country, Germany lives off exports. It is highly geared to the ups and downs of the global trade cycle.
The omens are mixed. The Ifo Institute said its global economic climate index for the fourth quarter is still deteriorating, falling from minus 10.1 to minus 18.8 points. The overnight news from China was unrelentingly weak.
Ting Lu from Nomura said retail sales, fixed asset investment, export value, and land sales all deteriorated in October. Growth of industrial output fell to 4.7pc, while production of steel and cement contracted.
He said this will force the People’s Bank to inject liquidity through its lending facility and cut borrowing costs, although incipient inflation makes monetary stimulus more treacherous. Stagflation is creeping in.
The Sino-US trade conflict has compounded the damage from China’s internal woes as it grapples with debt saturation and swathes of excess capacity. This cycle is different from past episodes, mild downturns followed by quick V-shaped rebounds. It has the hallmarks of post-bubble "Japanisation’"
Liu Aihua from China’s statistics bureau issued a candid warning that the country is not yet out of the woods. “Downward pressure on the economy has increased continuously. The risks and challenges we are facing cannot be underestimated,” she said.
China’s troubles pose a structural threat to the German economic model. The German Council of Economic Experts says a permanent 10pc decline in exports to China cuts German GDP by 4.8pc within a four-year period. This level of dependency is staggering.
China is shifting to a strategy of import substitution and partial autarky for reasons of strategic security. It is no longer an insatiable market for German capital goods. It is a rival. The council said China has moved up the technology ladder and is now competing toe-to-toe in the same niches.
Andrew Kenningham from Capital Economics said it is too early to conclude that Germany is back on track after just a flicker of growth. “We think the economy will probably contract slightly next year – so a recession may have been postponed rather than avoided altogether,” he said.
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