German Manufacturing Slump Casts Cloud Over Europe's Economy

(Bloomberg) -- Germany’s industrial slump worsened at the start of 2019, dragging the euro-area economy into its worst performance in more than five years.

IHS Markit’s monthly index showed manufacturing in Germany shrank for the first time in four years. In the euro area it barely grew, and a broader measure of activity dropped to the weakest since 2013.

The euro fell after the disappointing numbers and was down 0.2 percent to $1.1357 as of 10:07 a.m. Germany’s 10-year yield slipped two basis points to 0.21 percent.

German Manufacturing Slump Casts Cloud Over Europe's Economy

The readings will reinforce fears about the health of both the European and the global economy. That’s been a key talking point at the World Economic Forum in Davos this week, where the IMF cut its outlook and said an escalation of trade tensions could add further damage.

Those concerns will also play into the discussion among European Central Bank policy makers, who meet in Frankfurt on Thursday. The ECB ended net bond buying last month. While officials already indicated then that they wouldn’t start raising interest rates for some time, the deteriorating outlook suggests they may hold off even longer.

What Our Economists Say...

“While data are not yet available for other countries, decline in the euro area PMI suggests weaker readings as well. This poses a clear downside risk to the latest ECB projections for 0.4 percent growth in 4Q18 and 0.5 percent in 1Q19. It confirms a clear loss of momentum and increases the likelihood that Draghi will describe risks to the outlook as tilted to the downside at the central bank’s press conference later today.”
--Maeva Cousin, Bloomberg Economics. Read the full REACT

The big factors weighing on global growth are China’s slowdown and the U.S.-China trade dispute. Europe is also taking blows from weakness in the auto industry, protests in France and Brexit uncertainty. Some economists expect ECB President Mario Draghi to acknowledge this by downgrading his assessment of the economy.

“A deeper malaise has set in,” said Chris Williamson, chief business economist at IHS Markit. “Companies are concerned about a wider economic slowdown gathering momentum, with rising political and economic uncertainty increasingly affecting risk appetite and demand.”

The gauge for German manufacturing fell to 49.9 from 51.5. Readings below 50 indicate a contraction and forecasts were for it to be unchanged. New orders fell at the sharpest pace since 2012, with the auto industry and weaker demand in China cited. In brighter news, the measure for services rose, lifting the composite to 52.1, though that’s still only a two-month high.

France also reported gloomy figures on Thursday, with its composite measure of manufacturing and services dropping to the lowest in more than four years. The euro-zone number fell to 50.7 from 51.1.

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