iFO "Shocker": Another Poor German Economic Release adds to Growth Concerns

German economic growth slowdown

Image © Thorsten Schier, Adobe Images

Germany's most prominent leading indicator, the Ifo Business Climate index, plunged in January, adding to latest growth concerns.

The headline read at 99.1, down from 101 in December and below expectations for a reading of 100.7.

"That’s a shocker," says Carsten Brzeski, Chief Economist at ING Bank N.V.'s German unit, "it could take until the second quarter before the German economy regains momentum."

Data shows German manufacturing lost further momentum with the ongoing hit to car production seen as a key suspect for the decline.

The iFO say exports expectations fell again, with Brexit uncertainty and the U.S. government shutdown dampening the business climate in Germany.

"One major driver for the latest deterioration was Brexit and the related uncertainty for German companies. With an export volume of EUR 85bn (auto industry: EUR 25bn), the UK is nearly on an equal footing with China. Fears of a global slowdown and international trade tensions also played a role," says Dr. Andreas Rees, Chief German Economist st UniCredit Bank in Frankfurt.

Economists at the Munich-based iFO institute are forecasting 1.1% GDP growth for Germany in 2019.

"The manufacturing sector has been on a downward trend since last August, dragging the entire economy down," says ING's Brzeski, adding:

"The German economy is currently suffering from a strange and also unique combination of homemade one-off factors such as the delayed introduction of new emission standards in the automotive sector or low water levels which prevented dropping global oil prices from reaching consumers but also a series of external uncertainties."

The iFO data comes a day after other survey data confirms an ongoing slowdown in growth. The German manufacturing PMI fell to 49.9 in January, down from 51.5 in December and far below the consensus for a modest increase to 51.5. Anything below 50 is consistent with contraction.

"Lower demand in overseas markets (particularly China) and heightened uncertainty were all highlighted as factors. New export orders fell at an accelerated rate across both monitored sectors during the month," say IHS Markit, compilers of the PMI report.

The European Central Bank on Thursday signalled greater caution with regards to the Eurozone economy's outlook, saying risks were now tilted to the downside.

"The near-term growth momentum is likely to be weaker than previously anticipated," ECB President Mario Draghi told reporters following the Bank's January policy meeting, adding significant stimulus is still needed to sustain inflation.

This marks a more cautious tone from the ECB which appears to have dropped its previous optimism on the trajectory of the Eurozone's economy in 2019, and makes it unlikely we will see an interest rate rise come under the stewardship of Draghi who will hand over the reins to a new President in 2020.

Draghi says that when markets moved their expectations for a first interest rate rise from 2019 to 2020 they "understood our reaction function," i.e. this expectation is a correct one.

The current trajectory of Eurozone economic growth and ECB policy bode for a softer Euro going forward.

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