Employees secure wheels to a Fendt 828 Vario tractor inside the Fendt GmbH agricultural machinery factory in Marktoberdorf, Germany. (Photographer: Krisztian Bocsi/Bloomberg)

Germany’s Industry Shock Raises Specter of Economic Recession

(Bloomberg) -- A dramatic plunge in German industrial activity late last year raised the risk that Europe’s largest economy will slip into recession.

Production fell for a third month in November and posted its worst year-on-year drop since the end of the financial crisis, with weakness in everything from consumer goods to energy. A slump in Germany has repercussions for the euro area, where separate numbers on Tuesday showed economic confidence has fallen to the lowest in almost two years.

Germany’s Industry Shock Raises Specter of Economic Recession

It’s another headache for European Central Bank President Mario Draghi, who last month said the 19-nation economy has enough underlying momentum to justify a decision to stop adding monetary stimulus.

The German numbers, while volatile, follow a bigger-than-expected decline in factory orders. That’s sparked recession talk among investors and economists already fretting about slower global momentum.

Germany’s central bank said Tuesday it’s “looking through the volatility of monthly economic data” and doesn’t comment on individual indicators. It has long been expecting a rebound from a third-quarter contraction, arguing that temporary challenges are about to subside.

Now it seems some of those hurdles will take longer to overcome, potentially putting the economy on track for yet another quarter of shrinking output.

Low water levels on Germany’s longest river, the Rhine, have slowed deliveries, while production was paused due to the timing of public holidays. Moreover, struggles among carmakers in adapting to new emissions-testing procedures have failed to fully wear off.

What Our Economists Say...
“The latest data, even assuming a bounce back in December, mean industrial output probably contracted in the fourth quarter. The decline is big enough to have a meaningful impact on GDP growth, and creates a risk that the economy shrank again.”

-- Jamie Murray, Bloomberg Economics. Read more here

The euro slipped 0.4 percent to $1.1434 as of 3:30 p.m. Frankfurt time. European stocks rose as optimism about U.S.-China trade talks outweighed poor German data.

The euro-area economy is still evolving roughly in line with the ECB’s outlook and its guidance that it might raise interest rates later this year, according to Governing Council member Ardo Hansson.

“We seem to be on a trajectory, the same trajectory that we forecast some quarters back,” the Estonian told Bloomberg. “For every bit of bad news, you get a bit of better news, and on balance I don’t see this creates risks that shift the balance of risks.”

Some Optimism

Economists see some hope that the situation in Germany could improve. ING says private and public consumption have the potential to offset recession forces, and order books look healthy. Commerzbank says recent manufacturing numbers point to a potential stabilization.

Economists in Bloomberg’s latest monthly survey see economic expansion of 1.6 percent this year, matching the pace of 2018. A new survey will be released next Monday, a day before Germany’s statistics office publishes its own estimate for 2018 GDP growth.

“Carmakers are likely to catch up on their production, the ECB’s monetary policy remains investment-friendly, and China’s economic stimulus program is likely to boost the local economy, which will also benefit the German economy,” said Commerzbank analyst Marco Wagner.

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