Bruised Germany Is Canary in Coal Mine for Europe's Troubles

Is Germany the Canary in the Coal Mine for the EU?
  • Exports slump 5.2% in August, most since 2009 recession
  • Factory orders, industrial production unexpectedly decline

The euro area’s pillar of economic strength is starting to show cracks.

Germany’s manufacturing industry is taking a hit from cooling demand in emerging markets. Two of its icons -- Deutsche Bank AG and Volkswagen AG -- are in turmoil. And refugees are flooding across its borders at a rate of 10,000 a week.

The strains are putting the resilience of Europe’s economic powerhouse to the test after exports in August fell the most since the height of the 2009 recession, and factory orders and industrial output unexpectedly declined. The flood of bad news is all the more troubling as the 19-nation euro area strives to sustain an economic revival that remains fragile.

“Germany is the canary in the mine for Europe,” said Pau Morilla-Giner, chief investment officer at London & Capital Asset Management in London. “It is the most exposed country to what happens outside of the continent.”

German exports slumped 5.2 percent in August from the previous month, the Federal Statistics Office in Wiesbaden said on Thursday. That’s the most since the recession of 2009. Imports slid 3.1 percent, shrinking the trade surplus to 15.3 billion euros from 25 billion euros.

Weakening Trade

Weakening trade with China and Russia prompted Hamburger Hafen und Logistik AG, which handles about three in four containers at the city port, to cut its 2015 earnings forecast on declining container volume. Germany’s gateway to Asia serves as a major transfer hub for containers carried by deep-sea ships from the Pacific region and then reloaded onto smaller feeder vessels destined for Baltic Sea ports, including the Russian harbor of St. Petersburg.

Ludwigshafen-based BASF SE, whose dominance in the global chemical industry makes it a barometer for the German economy, is curbing spending and scrapped its 2020 profit and sales target on Sept. 28 after becoming more pessimistic on economic growth and chemical production.

The risks for Germany’s steel producers “have increased significantly, especially in the area of foreign trade, in recent weeks and months,” the Wirtschaftsvereinigung Stahl industry group said on Thursday in a report showing crude steel production fell almost four percent in September.

“One of the biggest pressure points for the euro zone’s fragile economic recovery is German export orders,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “News that they fell sharply throws the China-driven weakness in the global economy into sharp relief.”

Regulator Scrutiny

VW, Europe’s biggest carmaker, is reeling from a Sept. 18 revelation that it installed special software on as many as 11 million cars to fool U.S. pollution testers, in a scandal that has repercussions for suppliers and competitors as scrutiny from regulators tightens. The company said on Friday it was investigating whether the software was illegal also in the European Union.

Deutsche Bank is considering eliminating a dividend that’s stood since Germany’s postwar reconstruction. Co-CEO John Cryan is overhauling the bank that came to symbolize the nation’s stature as a global power before interest-rate rigging and currency manipulation scandals tainted its reputation and contributed to the departure of co-CEO Anshu Jain in June.

The Frankfurt-based lender said late Wednesday that it expects a 6.2 billion-euro loss in the third quarter as it writes down the value of its two largest divisions and boosts reserves for litigation. 

Other German lenders are also suffering. Operating profit at the country’s saving banks may fall by 2.3 billion euros, or 20 percent, by 2019 compared with 2014, according to the head of the institutes’ association, Georg Fahrenschon. Banks may be forced to lower costs, cut branches and reduce and standardize products, he said according to newspaper Handelsblatt.

Global headwinds prompted Germany’s leading economic institutes to lower their growth forecast for 2015 to 1.8 percent from 2.1 percent on Thursday. While they maintained their 2016 forecast -- also 1.8 percent -- they said the economy is in a state of “muted recovery.”

Private Consumption

The picture isn’t all bleak, according to Jens Kramer, an economist at NordLB in Hanover who said Thursday’s negative trade data belies the increasing role that consumers are playing in supporting the economy.

“It’s conspicuous that both imports and exports slumped,” said Kramer. “China, where domestic demand seems to stutter, is an important factor for us as an export-oriented economy. But German growth has been supported by private consumption, and that doesn’t go together with today’s numbers. For the moment, I wouldn’t overinterpret the data.”

Some indicators “such as service sector surveys and retail sales point to more resilient domestic conditions that can lean against the softer global environment,” said BNP Paribas SA economist Dominic Bryant.

With foreign sales up about 13 percent in annualized terms between January and July, according to Bryant’s calculations, “some of this decline may, therefore, be a correction to previously strong performance,” he said.

Euro-Area Recovery

Some companies are showing optimism. Chipmaker Infineon Technologies AG said it’ll invest about $300 million into a new factory in China, while medical technology company Carl Zeiss Meditec AB exceeded its revenue forecast for the 2014-2015 financial year. SMA Solar Technology AG raised its sales and earnings projections, citing continuing business growth, successful new product starts and a sustainable improvement in its competitiveness.

The euro-area’s recovery will be key to Germany’s economic prospects. Growth in the 19-national bloc is rebounding slowly thanks in part to the European Central Bank’s 1.1 trillion-euro ($1.2 trillion) asset-purchase program. An account of the ECB’s Sept. 2-3 policy meeting in Frankfurt showed that officials opted to take more time to understand the driving forces weighing on the economy.

“Seeping pessimism about long-term growth” is clouding prospects, Executive Board member Peter Praet said in a speech in Mannheim on Thursday. While a cyclical recovery “is progressively taking hold,” the negative stance “holds back a stronger recovery, as uncertainty about the future can feed back into weaker investment today,” he said.

Gradually rising investment in the euro area may bolster Germany’s economy in the months to come. Economic growth in the region will accelerate to 0.5 percent this quarter from 0.4 percent in the previous period, according to updated forecasts by Germany’s Ifo institute, France’s national statistics office Insee and Italy’s statistics agency Istat published on Tuesday.

“We have a global slowdown and things aren’t going too well outside Europe, but exports to countries inside the euro area are still at a good level,” Cyrus de la Rubia, chief economist at Hamburg-based HSH Nordbank AG, said by phone. “There’s no reason to panic.”

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