An employee fits a wheel to a Mercedes-Benz C-Class automobile on the assembly line at the luxury automaker’s factory in Bremen, Germany. (Photographer: Krisztian Bocsi/Bloomberg)

At Least One German Recession Indicator Is Now Flashing Orange

(Bloomberg) -- A sharp drop in industrial production and tumbling confidence indicators have prompted one think thank to raise the alarm over the risk of a slump in Europe’s largest economy.

The Dusseldorf-based Macroeconomic Policy Institute (IMK) says the danger of a German recession in the next three months jumped “markedly” in April, with the probability now at 32.4 percent, up from 6.8 percent in March.

At Least One German Recession Indicator Is Now Flashing Orange

The institute’s indicator is now orange -- the middle of its traffic-light warning system -- for the first time since March 2016. It covers a range of data that have signaled downturns in the past, including factory orders, business confidence, and interest-rate spreads. The risk, it says, is that uncertainty stemming from financial markets can have a self-reinforcing effect on the real economy.

“Volatility in financial markets, which has been evident for several months, is now accompanied by a noticeable deterioration in sentiment and subdued production. This has recently become a typical constellation for the end phase of a cycle,” according to IMK. “Whether such a downward spiral has already begun is currently unclear.”

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Such a sudden downturn would contrast with the Bundesbank’s outlook for the nation’s strong upturn to continue, and would throw the euro-area economy off-kilter just as the European Central Bank considers paring back stimulus.

IMK does note that monthly readings can be warped by one-off events, such as the recent unusually high level of sickness, and its overall forecast sees economic momentum being sustained for the moment. But the institute warns that it’ll have to revise its outlook should the negative trend solidify in coming months.

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