Business World

Tuesday 20 August 2019

'Devastating' slump in German manufacturing fuels rate cut talk

Frankfurt-based ECB tipped to cut rates
Frankfurt-based ECB tipped to cut rates

David Chance

German manufacturing output fell sharply in June, down 1.5pc month-on-month, far below analysts' expectations.

Economists' predictions of further gloom for Europe's largest economy have led to expectations that the European Central Bank (ECB) will lower interest rates next month. In the second quarter, output fell by 1.8pc from the first, driven by the export-oriented sectors that have underwritten Germany's economic boom, the country's economy ministry said.

"We would characterise today's industrial production report as devastating, with no silver lining," said Carsten Brzeski, chief economist for Germany at ING.

Germany's 10-year bond yield fell to a new record low of negative 0.56pc, as investors digested the news. The export-oriented economy is one of the most at risk in Europe from a slowdown in trade and from the impact of the snowballing trade war between China and the US and a rise in global protectionism.

However, the problems in German industry appear to reflect weak global demand rather than the impact of a trade war. Analysts say Europe should be able to exploit the Sino-US spat by exporting more to both markets in the short term.

"Things look set to get worse rather than better. Business surveys for July have uniformly signalled a continued manufacturing recession," said Andrew Kenningham, chief Europe economist at Capital Economics. There was a raft of larger-than- expected interest rate cuts from central banks across Asia as authorities took pre- emptive action against a downturn.

The US Federal Reserve last week cut rates for the first time in a decade and the ECB is expected to follow suit next month, although having failed to lift interest rates from zero, it faces a tougher challenge to stimulate the economy than the Fed.

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