BlackRock Investment Institute

Macro insights

A brighter outlook for German growth

German manufacturing data in January suggested demand is firming up, shaking off the trade drag that nearly pulled the German economy into recession last year. Our German Growth GPS points to a slight acceleration over the next three months to 0.9% year-over-year compared to the flash estimate of 0.6% recorded last year.

German economic activity

Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, ZEW, Sentix and Markit, January 2020. The chart shows sub-components of German manufacturing activity as per PMI indices, alongside measures of business and investor sentiment. Indexes have been standardized to bring all indexes to a common scale for comparability. We do this by scaling down each index by its respective volatility based on a sample of monthly data since 2014. The indexes are also normalized such that expansions in PMI-related series are consistent with positive values in the other data sets.

Signs of improvement were echoed by a slew of other indicators, as shown in the chart above. The ZEW investor sentiment survey showed business expectations for the next six months surging to a five-year high on the back of the phase one deal reached in the U.S.-China trade dispute. Within the manufacturing purchasing managers’ index (PMI), the output index edged up to a five-month high and new orders – a leading indicator – accelerated for the fourth consecutive month. New export orders jumped levels last seen a year and a half ago. The headline manufacturing PMI still points to a contraction, yet spillovers to the services sector appear limited with services PMI and its employment component improving.

A manufacturing-led pick-up in activity in Germany is consistent with one of our key macro views - global growth will edge higher in 2020. Financial conditions remain highly accommodative in the euro area. Over time the gap between our financial conditions index and the Growth GPS should close. Yet, as we discuss in our latest Macro and market perspectives, the reaction of the parts of the economy that are sensitive to financial conditions in the euro area is much weaker than in the US. This could speak to the fact that the ECB’s monetary policy is really starting to push on a string in the euro area. Potential downside risks include a re-escalation in U.S.-China trade tensions or Europe becoming the target of new protectionist measures by the U.S. administration.