An employee stands beside Mercedes-Benz GLC sports utility vehicles (SUV) on the assembly line at the luxury automaker’s factory in Bremen, Germany (Photographer: Krisztian Bocsi/Bloomberg) 

German Factories, Stuck in a Slump, Hold Back Euro-Area Economy

(Bloomberg) -- German manufacturing remained in a slump at the start of the second quarter, casting a cloud over the euro-area economy as well as the European Central Bank’s hopes for a quick recovery.

Factory output in Europe’s largest economy contracted for a fourth month running in April, according to a survey on Thursday. Manufacturing in the euro area also shrank, while a broader gauge of economic activity in the region declined.

Fresh signs of malaise contradict recent cautious optimism from ECB policy makers that the 19-nation economy will soon turn the corner. Governing Council member Ewald Nowotny said on Wednesday the economy should at least stabilize in the second half of the year.

Yet the German government this week slashed its outlook to predict the weakest expansion in six years. The ECB has already said it won’t raise interest rates at all this year, and more evidence of weakness across the region could force it to deploy fresh measures to support flagging growth.

German Factories, Stuck in a Slump, Hold Back Euro-Area Economy

The euro fell sharply after the Purchasing Managers Indexes were published, and was down 0.4 percent to $1.1252 as of 11:40 a.m. Frankfurt time. German 10-year bonds rose, pushing the yield back below 0.5 percent.

The euro-area figures “add to worries that the economy has failed to rebound with any conviction from one-off factors that dampened activity late last year,” said Chris Williamson, an economist at IHS Markit, which compiles the PMI.

The index suggests the currency region is running at a quarterly growth rate of just under 0.2 percent.

Weakness remained visible in other parts of the global economy. Japan’s exports shrank for a fourth straight month in March and manufacturing there continued to decline this month. That may change if the reasons for optimism about the Chinese economy seen in some recent figures is borne out in the coming months.

In Germany, the factory PMI came in at 44.5 in April, little changed from March and short of economists’ expectations. Demand was particularly weak in the key auto industry amid “some hesitancy among U.K.-based clients,” IHS Markit said. There was better news from the services index, which jumped to a seven-month high of 55.6, while employment in the sector rose.

What Bloomberg’s Economists Say

“The bulk of the weakness in the German economy since last summer is accounted for by the poor performance in the industrial sector. That the (much larger) services sector has motored along and the labor market remains tight, though, point to underlying resilience.”

--Jamie Murray
Click here for the full report.

In France, there were signs that activity is stabilizing, but the euro area’s second largest economy is still not out of woods. New orders fell for a fifth month and an “underlying slowdown in demand remains evident,” according to the French PMI report.

“The euro-zone economy will continue to grow only slightly in the first half of the year,” Christoph Weil at Commerzbank said. “However, we still expect the economy to pick up again in the second half of 2019. The headwind from foreign trade should gradually ease. The latest economic data from China point to a stabilization.”

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