(Bloomberg Opinion) -- Germany’s economic outlook resembles Winston Churchill’s description of Russia: a riddle wrapped in a mystery inside an enigma. Analysts are banging their heads over the contradictory data emanating from Europe’s largest economy after it narrowly escaped a recession at the end of last year.
The question of how severe Germany’s slowdown really is matters for policy makers, especially for those at the European Central Bank as they debate whether to loosen monetary policy. But there is a clear warning, too, for the politicians in Berlin: The country’s economy is too dependent on the vagaries of world trade. A rebalancing in favor of domestic demand, already underway, cannot come soon enough.
Industrial factory orders posted their worst decline since the financial crisis, falling by 4.2 percent between January and February, according to data published last week. Those figures followed an equally gloomy reading from the Purchasing Managers’ Index. The manufacturing indicator fell to 44.7 in March, the sharpest contraction since 2012.
From these numbers, one could easily conclude that Germany stands on the brink of a recession. Yet, if you look elsewhere, it is clear that the outlook isn’t as bad as it seems.
Industrial production climbed by 0.7 percent on a monthly basis in February, beating expectations. True, the increase was largely due to construction, while manufacturing contracted. However, the industrial production reading for January was revised up sharply from -0.8 percent to zero. Furthermore, indicators tracking the services sector — including the Purchasing Managers’ Index — are faring better. These figures give the impression of an economy which is slowing, but not imploding.
There is a way to reconcile these contradictory data. For a start, manufacturing is faring much worse than services because it is much more reliant on external demand. Germany’s exporters are bleeding as the trade conflict between the U.S. and China, as well as the threat of a fresh one between the U.S. and Europe, take their toll on global commerce. Conversely, the service sector can rely on a strengthening labor market, where unemployment is low and wages are finally rising. It is easier to be a hairdresser in Berlin these days than produce pieces of machinery that are shipped to China.
One-time factors continue to muddy the statistical outlook. The car industry is slowly recovering from a very tough year-end as it struggled to adapt to more stringent emissions limits. Motor-vehicle production rose 3.1 percent on a monthly basis in February. There are also signs of a tentative rebound in the sectors which were hit by the low water levels in the Rhine river last year. These transitory factors are disappearing, but only slowly.
There are also inconsistencies between data series which normally move in lockstep. Oliver Rakau, an economist at Oxford Economics, has noted how turnover data are faring much better than industrial production. This could be a sign that companies are destocking rather than producing new goods — or simply a statistical mistake which will be corrected in time.
The near-term outlook for the German economy is crucial for the ECB, which announced a new package of easing measures in March, even if some the details remain unclear. For now, it is hard to blame the central bank for being too timid: The outlook in Europe is objectively unclear, and Germany is a big part of this dilemma. As ECB President Mario Draghi said in a speech last month, if weakness in external demand is deterring companies and consumers from spending, the ECB would need to do more.
However, these short-term issues should be largely irrelevant for German politicians. Fiscal policy in Germany has already turned mildly expansionary — but there is no reason why Berlin shouldn’t use the current soft patch as a good reason to invest much more in infrastructure. That would help to rebalance the country’s economic model, which is still too exposed to the vagaries of external demand. There is a strong case, too, for companies to use their large surpluses to pay even higher wages and boost private investment, but that won’t happen as long as the outlook remains subdued. It is time for Germany to reboot its economic model, and the country’s politicians should take the lead.
To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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