A trough in German manufacturing?
The latest set of hard data out of Germany revealed an unexpectedly sharp drop. Manufacturing orders fell by 2.1% month-on-month (m-o-m) in December 2019, reflecting weaker euro area orders (-13.9%).The contraction was largely due to weak orders from Germany’s euro area partners, with the decline in demand for capital goods particularly sharp. The advance Q4 GDP number for Germany will be published on February 14. We are pencilling in 0.1% quarter-on-quarter growth—but December’s hard data poses the risk that growth was negative.
The substantial collapse in hard data for manufacturing is difficult to understand, especially in the light of recent survey trends (Ifo and Markit purchasing manager indexes). The fall excluding big items was less steep, suggesting that one-off factors may have played a role. December hard data are particularly revision prone, with the occurrence of Christmas in the middle of the week in 2019 possibly contributing to the decline in manufacturing figures that month. Domestic and orders from outside the euro area both firmed up in December, but industrial production (including construction) fell by 3.5% m-o-m, the sharpest monthly decline since August 2014.
Although we are not yet out of the wood, we continue to believe that the trough for German manufacturing was reached in Q4, and that there are clear prospects for a cyclical improvement. While the disruption caused by the 2019-nCoV outbreak could add some noise in the short term, we are sticking with our forecast of 0.7% GDP growth in Germany in 2020—but with risks tilted to the downside.