Euro area (EA) manufacturing continues to underperform. German manufacturing remains extremely fragile and faced with significant challenges, Spain and France, thanks to limited exposure to Asian export markets, have been showing signs of stabilisation.
As we highlighted in the past, Spain stands out as a relative winner among the four largest EA economies, mostly thanks to the very price-competitive position it acquired in the aftermath of the Global Financial Crisis and its greater dependence on intra-EA demand compared to Germany and Italy. Similar to Spain, French manufacturing has been insulated from the worst spillovers of the EM demand contraction and global trade slowdown.
German (and EA-wide) car production reflects the global slowdown and the retaliatory tariffs China imposed on car imports from the US. But other sectors are not faring well either – e.g. electrical components, metals and machinery. What’s more, the slowdown in foreign demand is now starting to filter through to domestic demand. More interestingly, and consistent with our expectations that German machinery and equipment capex is bound to slow markedly in the coming months, domestic capital goods orders have crashed and have also closed the gap with intermediate goods orders. In this context, the Bundesbank revision of Germany’s real GDP growth down to 0.6% for 2019 come as no surprise, and confirms our view that the slowdown in Germany and in other export-sensitive EA economies (e.g. Italy) will last for most of the current year.
All elements point to a continuation of the current stagnation in the euro area. Moderate optimism for Spanish and French data seems justified only in comparison to the bleak outlook for Germany.
As trade war sapped global growth and trade volumes Germany underperformed the rest of the euro area and entered technical recession in Q3 2019.