Gilles Moëc (Axa Investments Manager)| Those who like to see their glass half full probably took comfort in the fact that in Germany the manufacturing Purchasing Managers Index rebounded by 0.2 pp in October relative to September, but this was again short of expectations and the absolute level remains very concerning.
At 41.9, this is deep into “manufacturing recession territory”. We would need to see a much more significant rebound to be sure the ongoing German downturn can be nipped in the bud. Given its specific product mix the German industry is very dependent on the global investment cycle. From that point of view, we are concerned by the further deterioration in US capital goods orders. The key “non defence/non aircraft” component fell by 0.7% mom in September, well short of market expectations, and August was revised down. We may see some improvement once the “trade truce” starts percolating to US economic sentiment, but it may be too late for Germany to avoid a full-blown contagion to its own domestic economy. The drop in the services PMI there, to 51.2, is another worrying signal. The services sector may not be in contraction, but the PMI is now 0.5 standard deviation below its long term average.
Chatter about some fiscal flexibility in Germany continues to get momentum, but no hard decision has yet been made. We have already opined in Macrocast that while we think Berlin will give up the “Schwarz null” next year and let automatic stabilisers play, a clear conversion to a proper discretionary stimulus is not yet on the cards. Moreover, we note that on these matters implementation has not always been on par with intentions. The structural balance was supposed to be loosened by 1% of GDP in 2019 in the original programme agreed by the German government. According to the European Commission, the stimulus for this year will end up being closer to 0.5% of GDP.