German recession signal soars to “danger level” as global woes mount

20th April 2018
Resources Rising Stars

The economic outlook in Germany is deteriorating with alarming speed and any mistake by policy-makers could push the country into a full-blown slump, a leading economic institute has warned (reports Ambrose Evans-Pritchard in London’s Daily Telegraph).

“The danger of recession has increased markedly. It is a notably more critical picture than a month ago,” said the Macroeconomic Policy Institute (IMK) in Düsseldorf.

The IMK’s early warning indicator said the recession risk over the next three months has jumped suddenly to 32.4pc as trade tensions mount and liquidity ebbs away in the international financial system.

This is higher than in March 2008 when the pre-Lehman storm clouds were gathering and the country was already sliding into a slump, unbeknownst to Berlin at the time. It may be a false alarm but it clearly indicates that global growth is weaker than widely assumed just weeks ago.

“What we have seen lately is a typical late-cycle constellation, with uncertainty from the financial markets having a self-reinforcing spillover into the real economy. It is not yet clear whether such a downward spiral has already begun. Everything must be done to avoid intensifying the uncertainty,” it said.

Germany is heavily reliant on world trade and is therefore a bellwether for the broader health of the global economy. Its industrial sector lurched abruptly from boom to bust early in the last downturn and proved to be a leading indicator for the Great Recession.

JP Morgan’s instant "Nowcast" tracker of eurozone growth in the first quarter has dropped to 1.5pc, half the torrid pace of late 2017.

Germany is the chief supplier of machine tools and engineering equipment to China. The weakening data dovetails with signs that the Chinese economy has come off the boil since the Communist Party conclave last November. The delayed effect of credit curbs are biting. Beijing is trying to get a grip on its fiscal deficit, now 12pc of GDP (IMF definition).

Proxy measures put together by Capital Economics suggest that the true rate of economic growth in China has dropped to near 4.5pc, a "growth recession" in Chinese terms and a far cry from the "smoothed" official figure of 6.6pc.

The IMK said a confluence of US-China trade jitters, a decline in German industrial output, and a 7pc fall in the DAX index of equities since mid-January – led by bank stocks – were all feeding off each other.

The recession indicator was briefly higher during the Chinese currency crisis in early 2016. That storm passed for two key reasons: the US Federal Reserve backed away from monetary tightening, which eased pressure on the yuan and rescued China; and oil prices were then crashing due to a surge in supply, generating a $2 trillion windfall stimulus for global consumers.

The picture is very different today. The Fed is on the warpath. Joint production cuts by Opec and Russia have cleared the global oil glut. Brent crude prices have climbed back to $72 a barrel and may spike further if Donald Trump re-imposes sanctions on Iran in early May.

Crucially, the global money is slowing as quantitative easing goes into reverse, and as the Fed lifts global borrowing costs. Three-month Libor rates have jumped 60 basis points this year, hitting $9 trillion of floating contracts worldwide.

Simon Ward from Janus Henderson said the global economic slowdown was baked into the pie months ago when the money supply began to falter. His key indicator – six-month real M1 money – touched a nine-year low of 1pc in February.

Early data suggest a slight pick-up in March. This signal tends to lead the economy by around six months, suggesting that the global economy may remain trapped in the doldrums through the second and third quarters.

The monetary figures for the eurozone buckled last year. What is most striking is that the growth rate of real M1 deposits in France has dropped to 2.4pc from 7.3pc in September, and in Spain to 2.7pc from 6pc. Such falls do not in themselves imply a recession but they warrant caution.

It is clear that the eurozone boom in 2017 has fizzled out. There has been a blizzard of disappointing figures on industrial output, retail sales, and business confidence over recent weeks.

To view a full copy of the article from The Daily Telegraph, click here.

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