2019: German rebound only temporary

We said:

German preliminary Q1 GDP is softer than the headline suggests. Resurgent trade wars and weaker EM FX threaten the recovery. A negative contribution from net exports is already baked in the data.

Inventory is likely to have boosted domestic demand substantially. A mix of prolonged, unforeseen weakness in foreign demand and pre-Brexit stockpiling (perhaps also related to the acceleration of imports mentioned above) caused a build-up of inventory in Q1. Bottom line: as manufacturers constrain production and run down stocks of finished products in the coming quarter(s), a partial reversal of Germany’s current growth is on the cards.

More generally the global macroeconomic outlook has deteriorated markedly since President Trump imposed a new round of tariffs on China. A further ratcheting up of the US-China trade war is no longer a tail event. If Trump carries out his threat to levy duties on all Chinese imports, Beijing will have an incentive to double down on its credit stimulus, increasing the chances of a global rebound in 2019H2. However, non-oil emerging markets in S.E. Asia and Latin America are already suffering from a stronger dollar. S.E. Asia, LatAm and Turkey combined account for the same share of German exports as China. Adding Korea and Japan, which are not faring well either due to falling world trade, we get to 10% of total German exports – or about 4% of nominal annual GDP. In other words, the positive spillover effect of Chinese stimulus on export-dependent economies such as Germany and the rest of the EA could now be offset by further demand contraction in other major export markets. German growth seems poised to remain slow for longer and the balance of risks is now tilted to the downside.

Outcome:

Short-term German data continue to weaken to the extent that the authorities begin to contemplate fiscal stimulus. 

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