German, Japanese industry on increasingly parallel lines

February 10, 2016

Workers assemble BMW i3 electric cars at the production line of the BMW factory in Leipzig September 18, 2013.  REUTERS/Fabrizio Bensch (GERMANY - Tags: TRANSPORT) - RTX13PQV

A global slowdown in manufacturing that began late last year is getting more entrenched, particularly in Germany and Japan, economies that increasingly seem to share a lot in common apart from being the world’s two best-known exporters of high-tech cars and electronics.

Many still appear to be in denial about it.

The actual decline in monthly industrial output undercut even the most pessimistic call in Reuters polls for Germany, as well as France, Italy and Britain.

Industrial output

Over the past year, monthly industrial output data for Germany, Europe’s top economy, have come in above the median forecast only once. Over the same period, they’ve missed the lowest prediction three other times over the past year, and have never beat the most optimistic view.

Coming alongside data that showed declining import and export volumes and stagnant retail sales, that suggests to some a recession in Germany is a real risk.

Economists at Citi wrote:

The hard data point more to a Q4 contraction of GDP than the “quarter of a percent” increase the statistical office had estimated in January. We see a material risk of a downward revision. At this point, even a technical “winter recession” with two quarters of negative growth does not seem totally implausible anymore, in our view.

Early data for Q4, due Friday, are forecast to show only 0.3 percent quarter-on-quarter growth.

Germany was a pillar of strength for the region through the euro zone crisis. It came close to recession three years ago, but managed to skirt one.

Japan, on the other hand, has slipped into recession several times in recent years.

Apart from that, quantitative easing, a negative deposit rate, stagnant retail sales, low unemployment and wage rises, relatively strong currencies, government bonds that yield next to nothing are just some of the things it has in common with Germany.

Reeling stock markets, which they also share in common, certainly seem to be suggesting something bad is afoot.

Tokyo’s Nikkei crashed 5.5 percent on Tuesday and a further 2.3 percent on Wednesday while Germany’s DAX, the darling of investors when they got a whiff of ECB President Mario Draghi’s plans to launch quantitative easing a year ago, is down more than 15 percent a little over a month into 2016.

But Germany, unlike Japan, is supposed to be a beacon of growth and resilience, at least for Europe.

Carsten Brzeski of ING Financial Markets wrote:

The German “Wirtschaftswunder” (German for economic miracle) has only some domestic magic left… and is still standing on shaky grounds.

While the industry had been able to stomach the cooling of the Chinese economy, the slowdown of emerging markets, the euro crisis and geopolitical risks, it now seems as if extremely low oil prices and the slowdown of the U.S. economy are simply two risks too much for the industry. 

The U.S. economy also lost momentum in Q4, led by a downturn in factories held back by a strong dollar and unsold inventories.

While world trade has been slowing for a while, it’s never a particularly good sign if both the world’s top manufacturers of high-quality goods are stumbling.

(With additional reporting from Khushboo Mittal)

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