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- German economy on course for a tepid finish to 2018 after torrid period.
- Though 2019 will see pressure ease, growth rebound, says Berenberg.
- But the EURUSD and European Central Bank outlooks both depend on it.
The German economy faces a tepid finish to 2018 following a weak third-quarter and after a hat-trick of business surveys showed headwinds to growth mounting, but economists at Berenberg Bank say the slowdown is just temporary.
Confidence about the business outlook nosedived during October for the third consecutive month, according to the latest Ifo Business Climate index, which fell from 102.9 to 102 during the recent month.
Monday's Ifo Business Climate index is an influential survey that measures optimism about the general business outlook across a group of some 7,000 German companies. The index has fallen from 115.4 at the start of the year and is down from 117.6 at the end of 2017.
Uncertainty about the outlook for international trade in the face of President Donald Trump's "trade war" with China, its implications for the German economy and another deterioration in the European political outlook have all weighed on sentiment in 2018.
"Sentiment among German businesses weakened further this month," the Ifo says. "Their business expectations also clouded over. Together with other indicators, these results point to 0.3 percent economic growth in the fourth quarter at most. The German economy is cooling down."
October's survey comes just days after IHS Markit PMI data showed Germany's mighty manufacturing sector growing at its slowest pace for more than four years and follows closely behind the latest GDP report, which showed the German economy contracting during the third-quarter after new regulations disrupted production in the car manufacturing sector.
Eurozone growth slowed from a downwardly-revised 0.6% at the end of 2017 to just 0.2% in the third quarter while German growth fell from 0.6% to -0.2%.
However, some economists say all of this bad news is just a temporary phenomenon and that Spring 2019 should see the current economic clouds lift.
"The new drop in the Ifo business climate limits the scope for a rebound from the dismal -0.2% qoq GDP result of Q3. As car production recovers from the one-off plunge in Q3 caused by the transition to new emission testing standards, Q4 GDP can rise by up to 0.4% qoq. After a grey winter, chances are that solid domestic fundamentals can pave the way for more sustained growth again from spring 2019 onwards," says Holger Schmeiding, an economist at Berenberg.
Schmeiding says external events like President Trump's trade war will weigh most heavily on export-dependent economies like Germany's, and on structurally weak economies like Italy, until the world's two largest economies reach a truce and other headwinds begin to fade. He forecasts that those pitfalls will all ebb away in the early stages of 2019.
However, if Schmeiding is wrong about pressures receding then the Euro outlook could darken substantially once into 2019 because the single currency's appeal to investors is hinged upon the bloc's economy growing at a pace sufficient enough to support a sustainable return of inflation toward the target of "close to but below 2%".
Only once that sustainable recovery of inflation is in sight will the European Central Bank (ECB) be free to begin normalising its interest rate structure, which is still calibrated to its crisis-era settings.
The ECB said in October it still intends to end its quantitative easing programme in December, through which it has kept continental bond yields pinned down at record lows in order to stimulate the economy and stoke inflation.
But the bank also reiterated guidance that benchmark interest rates will remain at record lows at least "through the summer of 2019", which markets have taken to mean that a rate rise won't come until the end of 2019.
However, both those commitments were made at a time when the full extent of the third-quarter slowdown was not known and risks to the outlook were judged as still "balanced".
ECB chief Mario Draghi noted the disappointing data in discussion with the European Union parliament Monday, although he stopped short of describing it as entirely a "temporary" phenomenon.
"With the dramatic collapse of the oil price long term inflation expectations are also falling once again. On Friday this was most obvious in the euro zone," Ulrich Leuchtmann, head of FX strategy at Commerzbank. "Concerns about a slide into weak growth seem particularly pronounced here."
Leuchtman says that if concerns about the Eurozone growth outlook were to mount further over coming months the market could begin to give up any hope of seeing the ECB lift its interest rate in 2019, which would be sure to deal the Euro a blow. Although he also says this is not what the Commerzbank economics team expects to see happen.
"Provided the dispute over the Italian budget plans does not escalate and risk premiums on Italian government bonds do not rise further, EUR-USD should stabilize around current levels," Leuchtmann says.
The Euro-to-Dollar rate was quoted 0.32% higher at 1.1369 following the release Monday but is down -5.2% for 2018, while the Euro-to-Pound rate was 0.10% higher at 0.8844 and is down -0.03% for the year.
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