Christian Schulz, economics team director at Citigroup, warns that Germany's manufacturing slump could accelerate and risks broadening into a “downward spiral” into a more widespread recession.
He spoke to Bloomberg Television after Germany’s export-dependent manufacturing sector remained in contraction in August, a survey showed on Monday, as weaker demand pushed companies to scale back production and cut jobs.
IHS Markit’s Purchasing Managers’ Index (PMI) for manufacturing, which accounts for about a fifth of the economy, rose slightly to 43.5, remaining below the 50.0 mark separating growth from contraction for an eight month in a row.
The figure was below a flash reading of 43.6 and close to July’s seven-year low reading.
Lower demand, especially for capital and intermediate goods, was behind the continued weakness in the sector. Manufacturers also cited reduced demand from the car industry, which is facing lower sales.
“There is a risk of a self-fulfilling downward spiral,” he told Bloomberg TV.
“The manufacturing sector in Germany certainly is experiencing a recession. That is not unusual. We have downturns in manufacturing globally all the time, and Germany is connected to that. China plays a big role in that. Brexit probably plays a role, so these are external factors,” he said.
“What normally happens in Germany, the manufacturing sector starts adjusting. The potential for the economy improves. The companies improve competitiveness, and the sector contribute positively again to the economy,” he explained.
“The problem at this point is we are at the lower bout in terms of interest rates, so the ECB cannot save the economy. All these external problems are not going away. Trade wars are not going away, China's slowdown is not going away, and who knows if Brexit will go away anytime soon either. That makes it more likely than usual that this manufacturing downturn turns into a broader crisis, a broader recession,” he warned.
“There is a real risk to the economy … with no help from anywhere else, and that leaves the onus firmly on Belin with fiscal policy, in my view. So some sort of action from Berlin is necessary. I hope, though, that it will not just be a fiscal stimulus as such but that it will also be accompanied by structural reforms with longer lasting impact on the German and the European economies.”
Meanwhile, the Monday survey also showed that sentiment about future output fell to a record low, pointing to pessimism among manufacturers, Reuters explained.
As a result, manufacturers sped up job cuts, which reached the fastest rate since July 2012.
“The slump in Germany’s manufacturing sector goes on and, with no light at the end of the tunnel just yet, the number of goods producers cutting staff continues to rise, boding ill for domestic demand,” said Phil Smith, principle economist at IHS Markit.
“Manufacturing is now not only in recession, but the PMI data also point to deflationary forces building with regard to producer prices as supply outstrips demand.”
Data published last week showed a rise in unemployment in August, eroding a pillar of growth that has helped support an economy whose traditionally powerful export engine is weakening and that could well slip into recession in the current quarter.
With its sales abroad hit by a worsening trade climate, a global economic slowdown and an increasingly chaotic run-up to Brexit, the bulk of Germany’s growth momentum is been generated domestically - a dependency that leaves it exposed to any weakening of the jobs market.
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