The Munich-based Ifo Institute has slashed its 2019 growth forecast for Germany from 1.1 to 0.6%. The revision comes after a two-month contraction in German manufacturing to start off the year. In February, Germany’s manufacturing PMI fell to a 74-month low of 47.6. IHS Markit’s PMI for the service industry on the other hand showed strength over the same period, hitting a five-month high of 55.1.
This resilience in German services helped the economy narrowly avoid a contraction over the fourth quarter. The economy registered zero growth over the final three months of 2018, and just 1.5% over the year overall – its slowest annual rate of expansion since 2013.
The manufacturing downturn over the last part of 2018 can be ascribed to German manufacturing’s exposure to the ebbs and flows of global trade. One survey by the DIHK Chambers of Industry and Commerce found that almost half of all German companies are currently encountering difficulties due to tariffs and trade barriers. The slowdown in China has also hit German exporters hard; factory orders are down and industrial output dropped in four consecutive months to close out 2018.
On the positive side, many of Germany’s domestic metrics are proving resilient: employment and consumption remains high, inflation of around 0.4% is more-or-less within the desired band, and real wages are steadily increasing. After years of budget surpluses, Berlin also has a lot of fiscal leeway with which to stimulate the economy should it be deemed necessary.
Germany’s recent economic problems are more systemic than idiosyncratic, stemming from shifts within the global trade system, namely the Trump tariffs, China’s slowdown, and to a lesser degree the uncertainty of the Brexit process. As such Berlin can expect a soft landing due to its otherwise strong economic fundamentals. However, since the German export juggernaut tends to be a primary driver of euro zone growth, this downturn is not entirely inconsequential, as it risks reverberating across an already weak regional landscape.
