The German economy is still in top gear – but confidence is waning over fears of a possible US trade war, coupled with a strong euro that is making exports more expensive.
Analysts say that overall, the latest figures show Europe’s most powerful economy is still booming, with manufacturing near maximum capacity.
But US President Donald Trump's decision to impose tough new tariffs on steel and aluminium imports – and the EU’s threat to retaliate – have put a big dampener on the outlook.
The ZEW Indicator of Economic Sentiment for Germany – which measures the level of optimism among analysts about the current economic situation and the six months ahead – showed a sharp decline in March.
The index fell by 12.7 points from 17.8 in February to just 5.1 in March, compared with January’s figure of 20.4 and the long-term average of 23.6.
Moreover, the percentage of experts expecting a decline over the next six months has risen by 7.2 percentage points to 12.9%.
Concerns over a possible US trade war also had a negative impact on the outlook for the eurozone as a whole, with the indicator plummeting 15.9 points from 29.3 to 13.4.
The assessment of the current situation in Germany has also experienced a decline, with the confidence indicator falling 1.6 to 90.7 points, while the eurozone dropped from 1.5 points to 56.2.
“Concerns over a US-led global trade conflict have made the experts more cautious in their prognoses. The strong euro is also hampering the economic outlook for Germany, a nation reliant on exports,” said ZEW president, professor Achim Wambach.
“Combined with the experts’ continued positive assessment of the current situation, however, the outlook is still largely positive.”
Meanwhile the ifo Institute’s Business Climate Index also fell in February, from 117.6 points in January to 115.4 points.
Companies were less satisfied with their current business situation, but the indicator was still at its second highest level since 1991, with economic growth of 0.7% in the first quarter.
“After the euphoria of recent months, companies’ assessments of the business outlook for the months ahead were also far less optimistic,” said ifo president Clemens Fuest.
In manufacturing the ifo index fell considerably from January’s record high. Assessments of the current business situation were slightly less favourable, though remaining at a high level, while manufacturers also revised down their business expectations.
The business climate also deteriorated wholesaling, retailing and construction.
Weak start to year
New industrial data released by the Federal Statistics Office confirms the German economy had a weak start to the new year.
Orders for goods dropped by 3.9% in January after falling 3.0% in December – the weakest figures since January 2017. Industrial production dropped only slightly in January by 0.1% month on month, from -0.3% in December, while both exports and imports declined by 0.5% month on month.
However, ING chief economist Carsten Brzeski is sanguine about the figures, observing that Germany often had a weak start to the year.
“In recent years, German economic data has been increasingly sensitive to seasonal effects and vacation planning,” he said. “We believe the weak January data is more a sign of an extended vacation period after Christmas than a structural slowdown at the end of a mature cycle.”
Full order books
Brzeski says the prospects for German industry “have rarely looked rosier”. Industrial capacity usage is at its highest level since 2008, while order-books are full and companies are reporting the longest-ever period of assured production.
However, he believes there is no room for complacency, saying “some darker clouds have appeared in the German economic sky”.
He, too, is concerned about the risk to the powerful German export machine from President Trump’s decision to impose import tariffs.
“The risk for Germany is a real one,” says Brzeski. “In 2017, the US was Germany’s largest export partner. The bilateral trade surplus amounted to more than €50bn, with vehicles and machinery recording the largest bilateral surplus.”
He says the only comforting factor for Germany on this front is that exports have become very diversified – Germany currently exports as much to Hungary, Poland and the Czech Republic as it does to the Netherlands, Belgium and Luxembourg, while exports to China have also rebounded.
Trump is not the only threat facing German industry. With the Brexit transition period now set to end on 31 December 2020, there are very real fears that if the EU plays hard ball with the UK in negotiations, Germany’s car manufacturers will face “big trouble” if bilateral tariffs are imposed.
Porsche’s finance chief Lutz Meschke recently told European Commissioner Elzbieta Bienkowska: “If the EU decides to stay completely negative in the negotiations, it will be very difficult to keep the price level for imports of goods to the UK at a stable level. You will have customs tariffs. It will make things difficult.
“Imposed trade tariffs will push up the price, weaken demand for Porsche cars in the UK, and ultimately put German jobs at risk. It’s an absolute must that both sides must reach a good compromise.”
Concluding his outlook on the German economy, the ifo’s Brzeski says: “New protectionism would definitely hurt the self-proclaimed export world champion… However, at least for the near term, there is plenty of evidence that the German economy will power ahead.”