The link between Germany and China
Since spring 2018 the signs of a German economic slowdown have been intensifying. As we stated in our Outlook 2019, we think the probability of a technical recession in Germany (i.e. two quarters of negative growth in a row) are high and it might be that the third and fourth quarter 2018 were both negative. The signs of a rebound in the fourth quarter are not good - October factory orders and industrial production was weak and business climate indices continue to decline.
One of the main drivers of Germany’s economic weakness is declining demand from China. The Chinese car market is shrinking for the first time since measurements began, creating a problem for German car manufacturers. And as the overall Chinese economy is slowing down, so is demand for German machinery and other industrial goods.
In fact, if it were just about the link between the German and the Chinese economy and if I was a gambling man, I would put my money on a shrinking economy in Germany in the fourth quarter. Our chart shows that the Chinese Manufacturing PMI is – unsurprisingly – also a leading indicator for German industrial production. And if we follow this indicator, German industrial production is heading for negative growth in the last two months of 2018. Given the imperfect correlation between the two indicators, it could well be that the November data point is positive, but the trend is clearly downwards and weaker industrial production, as well as factory orders, should be on the cards for the coming months.
The link between Germany and China
Source: Bloomberg, Fidante Capital.