As a blogger-colleague colourfully pointed out recently, if people in the locker-room of a swimming pool start to talk about „recession“ and „inverted yield curve“, the recession „is mainstream“. Accordingly, even German forecasting instutions, rather (in)famous for not spotting recessions correctly, are at least now considering an – albeit short – recession for Germany (namely, the „Institut für Weltwirtschaft“ (IfW), cf. here). Hence, the question is not, if and when the crisis will hit the German economy (as asked last month, here), but how hard and how long the impact will be and last. And this is a rather difficult question. But, let’s look into it in some more detail:
The pundits have now accepted that German GDP will also shrink in Q3/19 and Germany will thus at least enter a „technical recession“ – meaning two consecutive quarters of a shrinking economy (e.g. cf. the aforementioned IfW’s statement).
After an already rough June with a loss of 209 points, the German DAX took a further negative turn and in August: After closing at 12,189 points at the end of June, the leading German stock index lost further 250 points and closed at 11,939 points on 30 August 2019 (here).
As opined already last month, the figures concerning German exports seem to be prone to statistical glitches: After growing by 1.1% on a MoM-basis (even by 4.5% YoY) in May, cratering in June (-0.1% (MoM) / -8.0% (YoY)), they seemingly rebounced with a surprising +0.7% (MoM) and +3.8% (YoY). Hence, the bi-monthly loss is „only“ averaging to -4.2% (YoY). Still bad enough. Also, the decline in the German Target 2 balance of the previous month did not continue, which added roughly Euro 17 Billion to its volume, rising from roughly Euro 871 Billion in to roughly Euro 898 Billion July 2019. Meanwhile, the German inflation-rate declined from 1.7% (YoY) in July to 1.4% (YoY) in August 2019.
Also with a view to the aforementioned increase in exports in July 2019, it is interesting to note that the free-fall in Germany’s industrial production of the last months did not abate, but seems to slow a bit: After a -1.5% (MoM) / -5.2% (YoY) decline in June, industrial production „only“ lost a further -0.6% (MoM) / -4.2% (YoY) in July 2019. Given this steep and long decline in production (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); June: -1.5% (MoM), -5.2% (YoY)), it is hard to see, how exports will continue their rise in the coming months, let alone the German economy as a whole see some light at he end of the tunnel.
The slight ray of hope of last month, when German industrial orders 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), went up in smoke, with the figures for July 2019, when the sector posted a decline of -2.7% (MoM) and even -5.6% on a YoY-basis. Hence, there is few hope that the decline in production and exports might come to a halt in the third quarter.
Again, due to the holiday season, German unemployment-rate increased by another 44,000 (June: 59,000 (each MoM)), but decreased by another 31,000 on a YoY basis to now 2.319m unemployed, the unemployment rate rising from 5.0% in July to 5.1% in August 2019. In its accompanying press release, the Bundesagentur für Arbeit again points to the stagnation – albeit on a high level – of the job market.
The reverse of the previous trend of declining German corporate insolvencies did not last long: After rising by 3.3% (YoY) in May, the number of insolvencies rather crashed down to -14,3% (YoY) in June 2019. In total, corporate insolvencies declined by another -3.7% in the first half of 2019 (for a comment, cf. here (in German)). However, given the further decline in key figures of the German economy, it is hard to see these figures to further decline in the coming months.
The leading German sentiment indicators, despite not being totally in sync, still all point to a recession: the German (Industrial) Purchasing Managers’ Index (PMI) slightly increased from 43.2 points 1 August to 43.5 points on 2 September 2019. However, the ZEW Indicator, after reaching minus 1.1 points in July, lost another 12.4 points in August 2019 and is now at -13.5 points, the ZEW aptly commenting this with the words: „The probability of a recession is rising“. The Ifo business climate index, too, resumed its declining path and fell to 94.5 points in August 2019, hence, to its lowest level since November 2012.
To sum up: With the exception of exports important key indicators of the German economy now point south for several months. Hence, there is actually no room left to escape at least a technical recession with a German economy also shrinking in the third quarter of 2019. Although the ECB has – for the last time under the reign of Mr. Draghi – again drawn its „Bazooka“, trying to reanimate the economic climate with new rouds of NIRP and QE, it seems likely that this time, the central banks will not be able to at least avoid a recession altogether. Hopefully, they at least manage to soften the blow, but even this remains to be seen.