German Economic Weakness Casts Doubt on Eurozone Recovery

Another indication of weakening output in Germany is making economists reconsider Eurozone durability.

A composite index of services and manufacturing in the Eurozone fell five basis points to 53.4 in April, according to Markit Economics. The research firm’s index also suggested the slow pace of Eurozone growth is likely to persist in the second quarter, which the firm believes is attributable to weak global demand.

Another indication of weakening output in Germany is making economists reconsider Eurozone durability.

A composite index of services and manufacturing in the Eurozone fell five basis points to 53.4 in April, according to Markit Economics. The research firm’s index also suggested the slow pace of Eurozone growth is likely to persist in the second quarter, which the firm believes is attributable to weak global demand.

The region’s pickup in growth may begin to slow, as export-driven Germany faces difficulties.  Major trade partners in the region, as well as China, face limited demand for the business-to-business manufacturing products in which German firms specialize.  “At the moment, the extent of the slowing is not a major concern, but will no doubt be causing some nail-biting at the ECB as policymakers await signs that quantitative easing is the panacea the region needs,” said Markit Chief Economist Chris Williamson.

GDP Underperformance

Germany recently posted a disappointing growth rate, with first-quarter GDP rising by just 0.3%, below expectations of 0.5% growth. That increase stunned economists, as the country saw 0.7% growth in the last quarter of 2014. Government statistics agency Destatis said the country’s exports “were slightly up at the beginning of 2015,” adding that the country’s growth was driven mostly by a “stronger increase” in imports.

Meanwhile, neighboring Eurozone economy France posted 0.6% growth in the first quarter of 2015, above estimates of 0.4% growth. The country benefitted from an increase in demand for exports, which analysts attributed to the weaker euro.

The mixed performance from a debased currency indicates a lack of economic harmony in the Eurozone, as a weaker euro benefits some countries more than other countries. Economists also believe that the gains in France are only beginning, and some investment banks have told clients that the country’s growth rate may accelerate later in the year.

German Weakness and China

In Germany, Markit saw services and manufacturing fall in May from the prior month, when oil prices began to rise and the euro began to normalize. Markit’s composite index fell to 52.8 in May, from 54.1 in April, while France’s composite index rose from 50.6 in April to 51 in May.

Some analysts believe China is to blame for the weak data from Germany. China’s manufacturing PMI has fallen below 50 for most of the last six months, which has caused the government to lower interest rates three times since November. While the move is an attempt to stimulate more borrowing and manufacturing growth, the below-50 reading suggests that China’s manufacturing is actually shrinking.

This is a headwind to Germany, which sells manufacturing equipment and manufacturing services to China’s industrial sector. The fall in demand from China, if protracted, could weaken Germany further, while the less-exposed French market will continue to benefit from a weaker euro and greater competitiveness to the United States, the United Kingdom, and other Eurozone nations, which are its main trading partners.