The recession in German manufacturing is worse than we thought

Oxford Economics

Italy, France and the entire eurozone are following Germany into a manufacturing recession.

• The recession in German manufacturing is even worse than initial estimates, according to new PMI data.
• German factories are now reducing jobs.
• Hopefully, this is as bad as it gets - new data from China suggests new trade orders are on their way.

The German manufacturing sector "is clearly in deep recession" and is laying off workers, analysts said in notes today on data from the IHS Markit purchasing managers index, a measure of sentiment among factory executives.

Today's data shows that manufacturing is falling even faster than feared from estimates published a week or so ago.

Meanwhile, unemployment in Italy has started to rise, up 0.6 percentage points since late last year to 10.7%, after years of decline.

The collapse of German manufacturing is being mirrored across the continent. The average for the entire eurozone - the 19 countries that use the euro as a currency - is now in negative territory. Of the four largest economies, only Spain is in positive territory.

Pantheon Economics analyst Claus Vistesen called the numbers "horrific" and "horrible" in a note he sent to clients on Tuesday.

"Manufacturing conditions are now deteriorating at their fastest rate in more than six years, thanks mainly to a slump in external demand. New orders are falling steadily, which means that the small gains in production are exclusively driven by the clearing of existing orders. This, in turn, means that purchasing activity of production inputs has slumped. In addition, employment growth has slowed to a trickle, and we think the labour market in manufacturing will suffer further pains in coming months."

Last week he told clients that "manufacturers shed workers in March, for the first time since in three years."

Capital Economics analyst Andrew Kenningham, said in a note:

"Germany's manufacturing sector is clearly in a deep recession [but] the situation in the euro-zone as a whole is somewhat better. ... We still expect GDP in the euro-zone to increase by around 0.8% this year."

Stocks went up today because of positive manufacturing data from China. Europe is one of China's major import-export partners, and the expectation is that Chinese demand will have a positive effect on European factories.

"The Italian situation also remains a concern. However, the rise in manufacturing PMIs in key export markets, such as China, Turkey, Russia and Sweden in March, which were released overnight, highlight that global trade may be bottoming out, which should lift firms out of their gloomy mood towards the summer," Oxford Economics analyst Daniela Ordonez told clients.