Germany, the backbone of Europe's economy, 'hit a brick wall' in the second quarter

ManufacturingA worker grinds a metal shaft metal used in water pumps at a manufacturing unit on the outskirts of the western Indian city of Ahmedabad June 2, 2014.REUTERS/Amit Dave

  • Factory orders in Germany plunged by 2.2% month-to-month in May, well below the consensus for a 0.2% fall driven by a fall in exports.
  • Germany, Europe's largest economy, wobbled in the last quarter but a recession is unlikely, say economists.
  • If forecasts are correct, a decline in German manufacturing will have serious implications for the eurozone economy as a whole.
  • Read more at Markets Insider.

Data coming out of Germany was decent enough, says Pantheon Macroeconomics. But look a little closer, it said, and the good news "fades quickly."

Industrial production gained by 0.3% month-to-month in May, "lifted primarily by rising production of capital and consumer goods," Pantheon said, but the figure might be flattered by the clearing of work backlogs.

"Moreover, output of intermediate goods fell further, an ominous sign given that this sector often is a leading indicator for production of finished capital and consumer goods," the economists said.

"We're starting to fear a Q2 GDP crash in Germany," they warned.

Pantheon chartPantheon Macroeconomics

Why does this matter?

Germany is the world's fourth largest economy and the largest in the eurozone, meaning if the Germany economy stutters, the rest of Europe does and subsequently the rest of the world feels it.

So if German growth numbers are worse than expected, Oxford Economics says that its forecast for 0.3% GDP growth for the eurozone as a whole is likely to go down to 0.2%.

In April, Business Insider reported Germany's drop in PMI which at the time, analysts said, meant that the manufacturing sector "is clearly in deep recession."

This is an ongoing problem for Germany as well. Since Q4 last year, the German manufacturing sector has performed poorly, and there were warning signs of a "technical recession," though Pantheon Macroeconomics now say recession is unlikely.

For the rest of the eurozone, Oxford Economics said in a note: "We cannot ignore the scale of the troubles affecting the industrial part of the European economy and the implication for the broader outlook."

"With news on the trade front swinging from positive to negative on a daily basis and the threat of US tariffs on the European auto sector still a major risk, prospects for the industrial sector remain clouded by major uncertainty."

There are still some bright spots:

"Services activity still shows impressive resilience and remains isolated from the troubles plaguing the industrial sector," Oxford Economics said in a note on July 5.

They added that along with services "strong fundamentals and healthy labor markets continue to support the European domestic economy," partly filling the gap left behind by industry.

Overall, Oxford Economics says services and manufacturing's PMI gap in the eurozone continue to hover around the highest level since the global financial crisis.

See the chart below:

Eurozone PMIOxford Economics/ IHS Markit

This week's data release seems to only back the ongoing trend that Germany's industrial sector is declining, but is being masked by a continuing boon of the service industry.

For now that looks like it will stave off recession.

But with changes at the ECB later this year, eurozone economists will be hoping that Germany gets its much needed stimulus sooner rather than later.

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