German Factory Slump Leaves Euro Area as Global Laggard

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Europe’s position as the weak link in the global economy is becoming more entrenched, with a factory slump intensifying at the same time that Asia shows signs of stabilizing.

Monday saw another round of bad news; a German manufacturing gauge fell further than initially estimated to the worst in almost seven years, Italy’s industrial contraction deepened, and a euro-wide measure put confidence and demand at factories at a multi-year low. Inflation figures came in below expectations.

The European picture contrasts with an improvement in Asia, where Purchasing Managers’ Indexes were led higher in March by China returning to expansion. In the U.S., the PMI was little changed, while a separate gauge by the Institute for Supply Management rose more than forecast.

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Diverging fortunes indicate that Europe is suffering the most from both the global slowdown and trade-war crossfire between the U.S. and China. Difficulties are also partly homegrown, with prolonged disruption in the auto industry and the threat of a disorderly Brexit hurting confidence.

In the U.K., a manufacturing gauge jumped to a 13-month high as companies intensified stockpiling, with inventories reaching record levels.

The warning signs in the euro zone have already forced the European Central Bank to redraw its plans for exiting stimulus measures. They’ve also pushed investors into government bonds, sending the yield on 10-year German debt below zero for the first time since 2016.

ECB President Mario Draghi said in the institution’s annual report published Monday that the economy still needs significant monetary policy support.

“In view of the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets, the conduct of monetary policy in the euro area will continue to require patience, prudence and persistence,” he said.

Some of the poor survey results may be an overreaction to Brexit and trade worries, and won’t be reflected in hard data on the economy. In Germany, the closely watched Ifo business confidence index rose in March, as did a measure of expectations.

Still, the PMI figures will prove disappointing at the ECB, where there’s hope that the slowdown will soon bottom out, setting up an improvement later this year. For inflation, where the core rate fell to 0.8 percent, policy makers may point to the late timing of Easter and a likely rebound in April.

What Bloomberg Economics Says:

“Slower headline and core inflation probably reflects the timing of Easter holidays, but this may add to concern among policy makers at the European Central Bank that a slowdown in the euro-area economy is impacting prices.”

Maeva Cousin, economist
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The latest economic signs in Asia were brighter, with the factory PMI for Japan and South Korea both rising.

The region may be benefiting from China’s stimulus and positive signals from U.S.-China trade talks. But it’s not clear that will help the European situation just yet.

“If China’s growth rate is indeed bottoming out, the export outlook can improve,” said Berenberg economist Holger Schmieding. “However, it will likely take a few months until European industry starts to notice the impact of easing trade tensions and China’s stimulus to domestic demand.”

--With assistance from Carolynn Look, Jana Randow, Enda Curran and Mark Evans.

To contact the reporter on this story: William Horobin in Paris at whorobin@bloomberg.net

To contact the editor responsible for this story: Fergal O'Brien at fobrien@bloomberg.net

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