Ger­many on alert over re­ces­sion risk

Dus­sel­dorf think tank says dan­ger of down­turn in the coun­try has ‘in­creased markedly’ to 32.4pc

The Daily Telegraph - Business - - Front Page - By Am­brose Evans-Pritchard

‘Un­cer­tainty from the fi­nan­cial mar­kets is hav­ing a self-re­in­forc­ing spillover into the real econ­omy’

THE eco­nomic out­look in Ger­many is de­te­ri­o­rat­ing with alarm­ing speed and any mis­take by pol­i­cy­mak­ers may push the coun­try into a full-blown slump, a lead­ing eco­nomic in­sti­tute has warned.

“The dan­ger of re­ces­sion has in­creased markedly. It is a no­tably more crit­i­cal pic­ture than a month ago,” said the Macroe­co­nomic Pol­icy In­sti­tute

(IMK) in Düs­sel­dorf.

The IMK’s early warn­ing in­di­ca­tor said the re­ces­sion risk over the next three months has jumped to 32.4pc as trade ten­sions mount and liq­uid­ity ebbs away in the fi­nan­cial sys­tem. This is higher than in March 2008 when the pre-Lehman storm clouds were gath­er­ing and the coun­try was al­ready slid­ing into slump, un­be­known to Ber­lin at the time. It may be a false alarm, but it clearly in­di­cates that global growth is weaker than widely as­sumed just weeks ago. “What we have seen lately is a typ­i­cal late-cy­cle con­stel­la­tion, with un­cer­tainty from the fi­nan­cial mar­kets hav­ing a self-re­in­forc­ing spillover into the real econ­omy. It is not yet clear whether such a down­ward spi­ral has al­ready be­gun. Ev­ery­thing must be done to avoid in­ten­si­fy­ing the un­cer­tainty,” it said.

Ger­many is heav­ily re­liant on world trade and is there­fore a bell­wether for the broader health of the global econ­omy. Its in­dus­trial sec­tor lurched abruptly from boom to bust early in the last down­turn and proved to be a lead­ing in­di­ca­tor for the Great Re­ces­sion.

JP Mor­gan’s in­stant “Now­cast” tracker of eu­ro­zone growth in the first quar­ter has dropped to 1.5pc, half the tor­rid pace of late 2017. Ger­many is the chief sup­plier of ma­chine tools and en­gi­neer­ing equip­ment to China. The weak­en­ing data dove­tails with signs that the Chi­nese econ­omy has come off the boil since the Com­mu­nist Party con­clave last Novem­ber. The de­layed ef­fect of credit curbs is bit­ing. Bei­jing is try­ing to get a grip on its fis­cal deficit, now 12pc of GDP. Proxy mea­sures put to­gether by Cap­i­tal Eco­nom­ics sug­gest that the true rate of eco­nomic growth in China has dropped to near 4.5pc, a “growth re­ces­sion” in Chi­nese terms and a far cry from the “smoothed” of­fi­cial fig­ure of 6.6pc.

The IMK said a con­flu­ence of USChina trade jit­ters, a de­cline in Ger­man in­dus­trial out­put and a 7pc fall in the DAX in­dex of eq­ui­ties since midJan­uary – led by bank stocks – were all feed­ing off each other.

The re­ces­sion in­di­ca­tor was briefly higher in the Chi­nese cur­rency cri­sis in early 2016. That storm passed for two key rea­sons: the US Fed­eral Re­serve backed away from mon­e­tary tight­en­ing, which eased pres­sure on the yuan and res­cued China; and oil prices were then crash­ing due to a surge in sup­ply, gen­er­at­ing a $2 tril­lion wind­fall stim­u­lus for global con­sumers.

The pic­ture is very dif­fer­ent to­day. The Fed is on the warpath. Joint pro­duc­tion cuts by Opec and Rus­sia have cleared the global oil glut. Brent crude prices are back to $72 a bar­rel.

Cru­cially, the global money is slow­ing as quan­ti­ta­tive easing goes into re­verse, and as the Fed lifts global bor­row­ing costs. Three-month Li­bor rates have jumped 60 ba­sis points this year, hit­ting $9 tril­lion of float­ing con­tracts world­wide. Si­mon Ward, from

Janus Hen­der­son, said the global eco­nomic slow­down was baked into the pie months ago when the money sup­ply be­gan to fal­ter. His key in­di­ca­tor – six-month real M1 money – touched a nine-year low of 1pc in Fe­bru­ary.

Early data sug­gest a slight pick-up in March. This sig­nal tends to lead the econ­omy by around six months, sug­gest­ing that the global econ­omy may re­main trapped in the dol­drums through the sec­ond and third quar­ters.

The mon­e­tary fig­ures for the eu­ro­zone buck­led last year. What is most strik­ing is that the growth rate of real M1 de­posits in France has dropped to 2.4pc from 7.3pc in Septem­ber, and in Spain to 2.7pc from 6pc. Such falls do not in them­selves im­ply a re­ces­sion but they war­rant cau­tion.

The Euro­pean Cen­tral Bank faces a treach­er­ous task as it pre­pares to phase out QE al­to­gether this year. The risk is that the ECB could tighten too hard and cause the cur­rent soft patch to metas­ta­sise into a full-blown down­turn.

Mone­tarists ar­gue that the US liq­uid­ity squeeze is al­ready hav­ing pow­er­ful ef­fects. The Fed has pen­cilled in four rate rises this year. It is cur­rently shrink­ing its bal­ance sheet by $30bn (£21bn) a month. The pace of quan­ti­ta­tive tight­en­ing (QT) will rise to $50bn a month in the fourth quar­ter.

The pic­ture is fluid. Opin­ions dif­fer widely, with most an­a­lysts still pre­dict­ing healthy global growth this year. Some ex­pect a blow-off boom as the stim­u­lus from Don­ald Trump’s tax cuts feed through into fresh spend­ing. What is clear is that the voices of dis­sent are grow­ing louder and more nu­mer­ous.

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