That Shrinking Feeling

German economic activity shrinks for the first time in 6 and a half years

Image source: Internet Archive Book Images - Flickr, raresirimie, andersphoto, Rachel Juliet Lerch - Shutterstock

What's going on?

Fresh data on Monday showed German economic activity shrank in September for the first time in six and a half years – and the jury’s out on just how deep this rabbit-hole could go.

What does this mean?

Monthly surveys ask companies in the manufacturing sector (e.g. Volkswagen) and services sector (e.g. Deutsche Bank) how busy they’ve been. And in September, those in the eurozone weren’t as busy as expected. In fact, the measure hit a six-year low, with services growth slower than last month and manufacturing growth shrinking by the most this year. Germany was particularly badly hit: activity there shrank for the first time since May 2013.

Across the pond, it’s a different story: US manufacturing activity hit a five-month high, with services growing since last month, and overall activity beating expectations. But growth is still slow, and a measure of employment in the services industry signaled there might be job losses for the first time since December 2009.

Why should I care?

For markets: Who to believe…
“Soft” survey data isn’t the be all and end all. On previous occasions, in fact, negative soft data has been followed by positive “hard” data (that is, verifiable measurements of the economy’s growth). In the US, soft data and hard economic data are diverging, perhaps indicating an overly pessimistic workforce. Investors, then, might have been trigger-happy on Monday: they listened to the soft data and sent stocks down.

The bigger picture: Life support.
Investors will likely be glad that both the US and European central banks recently cut interest rates – a move that should (in theory) boost both economies. The market’s reaction on Monday could help: the euro dropped in value against the dollar, which should boost European exports. That’s something the whole economy, Germany in particular, desperately needs. But there are bigger problems at play – namely a slowing Chinese economy and the uncertainty caused by Brexit.

Originally posted as part of the Finimize daily email.

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