German Manufacturing Ominous for Eurozone

Written By Brian Hicks

Posted April 24, 2013

Germany has, so far, been the only European nation to have withstood the buffeting the rest of the Eurozone has experienced in terms of financial fluctuations. Now, it seems even that may be at risk.

Angela MerkelFinancial data provider Markit reports that its purchasing managers’ index, or PMI, for German manufacturing and services for April was at 48.8, down from March’s 50.6. The April figure marks a 6-month low and indicates the first actual shrinkage in output since November. This is serious business.

Readings for the Eurozone at large remained at 46.5, meaning there’s been a drop in activity yet again—this would be the nineteenth such drop in twenty months. New businesses in the manufacturing and services sector appear to have experienced their most drastic declines since December.

CNNMoney quotes Markit’s Chief Economist, Chris Williamson:

“Worryingly, the rate of loss of new business gathered further momentum, suggesting that activity and employment could fall at steeper rates in May,” he said.

“The renewed decline in Germany will also raise fears that the region’s largest growth engine has moved into reverse, thereby acting as a drag on the region at the same time as particularly steep downturns persist in France, Italy and Spain,” Williamson added.

Cyprus Backlash

Certainly, at least part of this is a reaction to the chaotic situation in Cyprus (and, by extension, concerns over the fate of Southern European countries). Moreover, France’s private sector output also contracted over April, though at a slower rate.

The Markit data suggests an overall contraction in the Eurozone economy of 0.4 percent over April. Early expectations pegged this at a likely 0.2-0.3 percent. Adding to Europe’s negative outlook, the IMF had already reduced its yearly forecast for the economy last week. According to the revised figures, GDP for the Eurozone is expected to drop by 0.3 percent.

Amidst all these negative projections, the idea of a German recession is, frankly, rather scary. Germany has remained one of the pillars of (relative) financial health while most of the Western world lost its marbles. If Germany seriously heads into a sustained downturn, it will undoubtedly shake up the markets in a dramatic fashion.

Already, Q1 sales of new cars in Germany are down 13 percent, indicating falling consumer confidence. Should PMI data from other nations reflect a spreading decline, the European Central Bank may well consider further reductions in interest rates in addition to other measures.

Within hours of Tuesday’s news about Germany’s surprise PMI contraction, the euro reacted by dropping slightly against the U.S. dollar at $1.298. As well, the German stock market is down slightly; no doubt it will take some time for investors and traders to consider their response to the alarming data.

Crisis Ripple Effects

All of this has echoed around U.S. markets, too, as stock index futures declined yesterday. Both the pessimistic German figures and newly-lowered data from China contributed.

Meanwhile, several major firms continue to report their financials, including Apple (NASDAQ:AAPL) and Netflix (NASDAQ:NFLX). Nonetheless, the Dow Jones was down 34 points to 14465, and the S&P 500 was down 5 points to 1550.90, per Fox Business.

It’s highly likely that the ECB is going to introduce further rate cuts, which will hopefully bring the markets back up somewhat. However, given Germany’s data, it remains uncertain how much of an impact this will have. If Germany—the main driver of Eurozone growth through the crisis—reveals a downturn at this point, then the ECB’s cuts alone may not really make a dent.

One positive note can be discerned in the domestic housing market. New single-family home sales rose to a yearly rate of 421,000 for March, after February’s 411,000. New home sales have risen by 12 percent over the past 12 months, with more figures due out today.

Meanwhile, HSBC had reported a lowered PMI reading for China—a two month low of 50.5 from March’s 51.6—which added to the market’s general lows. All eyes will remain on the European markets for the near future, and especially on Germany.

Investors continue to seek out precious metals, both gold and silver, but also platinum and palladium. These last two seem to be attractive due to their wide applications in industry, particularly the automotive sector.


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