Germany’s economic data contradicts itself

Germany’s economic outlook resembles Winston Churchill’s description of Russia: a riddle wrapped in a mystery inside an enigma. Analysts are banging their heads over the contradictory data emanating from Europe’s largest economy after it narrowly escaped a recession at the end of last year.
The question of how severe Germany’s slowdown really is matters for policy makers, especially for those at the European Central Bank (ECB) as they debate whether to loosen monetary policy. But there is a clear warning, too, for the politicians in Berlin: The country’s economy is too dependent on the vagaries of world trade. A rebalancing in favour of domestic demand, already underway, cannot come soon enough.
Industrial factory orders posted their worst decline since the financial crisis, falling by 4.2% between January and February, according to data. Those figures followed an equally gloomy reading from the Purchasing Managers’ Index. The manufacturing indicator fell
to 44.7 in March, the sharpest contraction since 2012.
From these numbers, one could easily conclude that Germany stands on the brink of a recession. Yet, if you look elsewhere, it is clear that the outlook isn’t as bad as it seems.
Industrial production climbed by 0.7 percent on a monthly basis in February, beating expectations. True, the increase was largely due to construction, while manufacturing contracted. However, the industrial production reading for January was revised up sharply from -0.8% to zero. Furthermore, indicators tracking the services sector are faring better. These figures give the impression of an economy which is slowing, but not imploding.
There is a way to reconcile these contradictory data. For a start, manufacturing is faring much worse than services because it is much more reliant on external demand. Germany’s exporters are bleeding as the trade conflict between the US and China, as well as the threat of a fresh one between the US and Europe, take their toll on global commerce.
One-time factors continue to muddy statistical outlook. The car industry is slowly recovering from a very tough year-end as
it struggled to adapt to more stringent emissions limits.
The near-term outlook for the German economy is crucial for the ECB, which announced a new package of easing measures in March, even if some the details remain unclear. For now, it is hard to blame the central bank for being too timid: The outlook in Europe is objectively unclear, and Germany is a big part of this dilemma.
Fiscal policy in Germany has already turned mildly expansionary — but there is no reason why Berlin shouldn’t use the current soft patch as a good reason to invest much more in infrastructure. That would help to rebalance country’s economic model, which is still too exposed to vagaries of external demand.
There is a strong case, too, for companies to use their large surpluses to pay even higher wages and boost private investment, but that won’t happen as long as the outlook remains subdued. It is time for Germany to reboot its economic model, and the country’s politicians should take the lead.
—Bloomberg

Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times