The Germany Economy is Doing Worse Than Previously Imagined

As Germany goes, so goes Europe. The engine of the eurozone economy is sputtering at an even worse rate than feared, new data shows, and it’s taking the rest of the bloc—including the euro—down with it.

The closely watched IHS Markit Eurozone Composite PMI released on Monday shows the EU’s manufacturing output fell to an 81-month low. The services sector, too, is flailing. New orders for goods and services fell in August, hit by a confluence of factors from the global trade war to Brexit uncertainty to evaporating spending power by Europe’s consumers and firms.

It’s created a domino effect of bad news. The dearth of factory and service business orders has stymied the jobs market, with unemployment levels returning to lows last seen in 2015. The hiring freeze in turn is sinking inflation. The weak price pressure is causing GDP to flatline. And now the outlook is growing increasingly gloomy with renewed fears that the 19-nation bloc is heading towards recession.

“The details of the survey suggest the risks are tilted towards the economy contracting in coming months,” said Chris Williamson, Chief Business Economist at IHS Markit. “Most vividly, new orders for goods and services are already falling at the fastest rate since mid-2013, suggesting firms will increasingly look to reduce output unless demand revives.”

“With survey data like these,” he continued, “pressure will grow on the ECB to add to its recent stimulus package.”

The concern that the European Central Bank will need to intervene further is sending the euro in a tailspin. The U.S.-dollar-to-euro exchange rate dropped below $1.10 as the markets opened in Europe on Monday, within a half-penny of its 52-week low. Earlier this month, the ECB cut its benchmark rate by 10 basis points and resumed its policy of quantitative easing. The plan calls for the ECB to spend as much as $22 billion a month buying bonds from eurozone countries “for as long as it takes,” outgoing ECB chief Mario Draghi said, until the purchases begin to goose up inflation rates.

The EU country-by-country economic outlook is down nearly across the board, but the deteriorating German numbers are particularly spooking investors. Germany’s services sector in August slowed to its worst rate in the past three years, the IHS Markit data showed. Manufacturing in the export-driven economy fared even worse, falling for an eighth straight month, and suffering the steepest one-month decline since July 2012.

“The economy is limping towards the final quarter of the year and, on its current trajectory, might not see any growth before the end of 2019,” Phil Smith, Principal Economist at IHS Markit, said of Germany.

“The manufacturing numbers are simply awful,” he continued. “All the uncertainty around trade wars, the outlook for the car industry and Brexit are paralyzing order books, with September seeing the worst performance from the sector since the depths of the financial crisis in 2009.”

While the markets had been bracing for more bad news out of Europe, the severity of the PMI data sent European indices down across the board, with Germany’s DAX down by more than 1 percent. Elsewhere, it not only sent the dollar higher against the euro, but it triggered a run on safe-haven U.S. Treasuries.