Germany’s industrial production slowdown sparks concerns of a recession

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Latest economic reports from Germany are sparking concerns. The slowdown in the 3rd quarter of 2018 could very well extend into the 4th quarter as well. The slowdown signaled by initial economic indicators comes as the ECB is looking to tighten its monetary policy.

Industrial production figures released over the week showed an unexpected decline in November. The data reflected a mix of headwinds facing Europe’s largest economy amid rising trade tensions and softer global demand.

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A monthly survey from the European Commission released last week showed that business confidence fell sharply in December. Various regional manufacturers including Spain, France, Italy, and Germany are downgrading their expectations on business outlook.

The weak patch of data comes as the Federal Reserve has been on policy tightening path. It aims to find a balance between higher interest rates to rein inflation and the global markets.

ECB has also reasons to be concerned

A slowdown from Germany will no doubt raise concerns for the European Central Bank which recently announced an end to its QE program which spanned over the years. Interest rates should remain steady until the middle of next year.

However, the Eurozone’s economy has been rising at a slower pace than what ECB officials had previously estimated. The first slowdown in the third quarter matches the temporary factors such as the automobile emission standards. However, the data released recently showed otherwise.

The ECB will likely face with a tough choice if the German economy continues to slide further. It could spark concerns of a recession, with the ECB’s interest rates near record lows. The Central Bank argued that its bond purchase program was the biggest driver of growth in the Eurozone’s economic recovery.

However, with the QE program ending in December, the slowdown could potentially come back to haunt the policymakers at the central bank.

Some of Germany’s key industrial sectors slowed when adjusted for inflation and seasonal changes. Industrial production dropped 1.9% in November compared to the month before. This was worse as economists forecasted an increase of 0.3%.

Industrial production fell for the second consecutive month as the data for October revised down to show a 0.8% decline on the month.

The data comes as manufacturing orders also fell, as seen in a separate report released earlier in the week.

The German economy declined in the third quarter of the year. This was the first pace of decline since 2015 with weaker exports hitting growth the hardest along with the emission standards hitting automobile production.

Italian economic performance under scrutiny

Besides Germany, the Italian economy also contracted in the third quarter of the year.

Following the weak patch of data, officials in Germany brushed aside the concerns of the economic softness and maintained the narrative that it was only temporary. Germany’s economy ministry said that the drop in industrial production was due to extra vacation days.

However, the slowdown was not just in Germany but also in other major regional economies in the Eurozone.

Growth was seen sliding sharply after reaching a decade high in 2017. The gains came due to a surge in exports and manufacturing which started the year 2018 on an optimistic note. However, the momentum was seen fading toward the end of the year.

The European Commission’s survey showed that the Economic Sentiment Indicator which is an aggregate measure of consumer and business confidence in the eurozone fell to 107.3 in December compared to 109.5 in the previous month. This was the lowest reading in the economic sentiment indicator since January 2017.

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