The spillover of weakness from the manufacturing sector to the consumer has been one of the biggest economic risks to developed nations this year, and it appears to be crystallising in the Eurozone’s largest economy, Germany.
The German Manufacturing Purchasing Managers’ Index (PMI) has been in contraction every month of 2019, and yesterday’s print of 41.9 is the second-lowest since the financial crisis (second to only last month’s reading). While German consumer data hasn’t posted decade lows just yet, the steep slide in the German GfK Consumer Confidence Index is not to be ignored. This morning’s release missed expectations and posted three-year lows of 9.6, signalling that German households are beginning to feel the brunt of the slowdown that has plagued the manufacturing sector.
Signs of consumer weakness are not as evident in other data—wage growth is resilient, and unemployment is still at multi-decade lows—but leading surveys influence expectations of future economic activity, and this morning’s GfK Consumer Confidence will stoke fears of impending German recession.
Bottom line: The outlook for the Eurozone is no brighter than it was earlier in the year and has prompted a controversial stimulus package from Draghi as he ends his stint as ECB Chief. Last month, the stimulus package divided ECB policymakers, but the economic data, as well as sustained downside risks, continue to back the policy decision. Perhaps a bigger worry should be how much the data will improve as the stimulus package channels its way through the Eurozone economy.
Yesterday’s downside Sterling move was due to a lack of political clarity, as the prospect of a general election has added to the near-term uncertainty in the ongoing Brexit debacle. It could be a quiet day today, with a maintained bias on the downside until there’s a breakthrough on Johnson’s deal or an election.
Likewise, for the Pound against the single currency, risks are tilted to the downside until European Officials decide how long they are prepared to delay Britain’s departure from the European Union. The European Central Bank left monetary policy unchanged during yesterday’s meeting with Mario Draghi, highlighting the continued risk of an economic downturn to the Euro area. A key support level for the pair remains around 1.1550; a break below could meet little resistance down to the 1.14 handle.
The pair is keeping afloat above the 1.11 level, having briefly dipped under following Draghi’s press conference yesterday. A weak reading in the German Gfk Consumer Climate Survey this morning compounded the miserable outlook for Europe’s largest economy.