Economy

German industrial production plunges most in four years

Nation’s central bank has suggested a persistent slump in Europe’s largest economy

German chancellor Angela Merkel listens during a press conference.

Fri Jun 7 2019 - 10:57

German industrial production plunged the most in almost four years in April and the nation’s central bank gave a gloomy assessment of the outlook, suggesting a persistent slump in Europe’s largest economy.

Factories are at the heart of the region’s slowdown, as trade tensions, weaker car sales and cooling global demand weigh on exports.

That's worrying European Central Bank policy makers, who fear the weakness will ripple through to other areas of the euro-area economy, where the services sector has so far had to prop up demand.

ECB president Mario Draghi summed up the fragile situation on Thursday after announcing fresh measures to support growth and pledged to do more if needed.

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“The key issue is: how long can the rest of the economy be insulated from a manufacturing sector that keeps on being weak?” he asked. “I think that’s what the Governing Council had in mind when they said they stand ready.”

Europe’s policy makers have had very little good news to cling to recently. While some confidence measures have edged up, surveys point to only modest growth, and a market measure of inflation expectations has plunged to a record low.

Expansion in Germany and the euro area came in stronger than expected at the start of the year, but the pace is forecast to drop off this quarter.

For the full year, economists see 1.2 per cent growth in the currency bloc, down from 1.9 per cent in 2018 and the weakest performance since 2013.

As investors continue to see poor prospects for the region, that’s fuelled demand for the safety of bonds, pushing yields on German 10-year debt firmly below zero.

Many investors also question what the ECB can do, given interest rates are at a record low and it faces restrictions on how much debt it can buy.

“Markets think things might get worse and therefore they might have to ease further,’’ John Wraith, an analyst at UBS, said on Bloomberg Television.

“There’s this uncomfortable realisation that the ECB is running out of road. They can talk a good game, but they can’t really act in a decisive way because they don’t have the ammunition.’’

In an interview on Friday, governing council member Vitas Vasiliauskas said the euro area’s inflation outlook is “not bad” and policy makers won’t rush into any action.

“Information is very mixed, and I would say an appropriate approach would be just to wait, because everything is changing very speedily,” he said.

Shortly after the German industry report, the Bundesbank issued its latest assessment of the economy, cutting its 2019 prediction to 0.6 per cent from 1.6 per cent.

The predictions are largely a catch-up with other forecasters – the central bank’s previous forecast was in December.

“After a period of boom, the economy in Germany is currently cooling noticeably,” the central bank said. This is due to “industry suffering from sluggish export developments.”

Bundesbank President Jens Weidmann struck a more positive tone, predicting a better second half for the economy. – Bloomberg

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