EuroWire May 2020

Transatlantic Cable

Ifo president Clemens Fuest said in a statement at the time, “The German economy seems una ected by developments surrounding the coronavirus,” and reiterated a rst-quarter growth forecast of 0.2 per cent. The institute warned, however, that the survey could not fully re ect the potential economic results of the coronavirus. A reduction in exports, combined with an automotive sector facing disruption from a costly move to electri cation, has prompted the German economy to lose momentum. However, Ifo said, a sub-index measuring morale in the manufacturing sector rose for the third consecutive month due to “a better orders outlook”. Andrew Kenningham, chief Europe economist at Capital Economics, commented, “The small rebound in February will be a relief for those braced for a big hit from the coronavirus, but it leaves the index below its [96.3] level in December. After at-lining in Q4 last year we suspect that the German economy will not grow in the rst half of this year either, even if the e ects of the coronavirus are contained.” German o cial gures released in February highlighted weakness in the manufacturing sector, showing that December 2019 recorded the biggest fall in German industrial output since 2009. And 2020 started brighter for the UK economy During February, the UK economy grew at its fastest rate since September 2018 but, as the month progressed, the manufacturing industry increasingly felt the impact of the coronavirus outbreak. The IHS Markit/CIPS UK Purchasing Managers’ Index for all business sectors rose to 53.0 in February, from 52.8 in January, supported by an upsurge in construction activity. The services PMI was down to 53.2, from the 16-month high of 53.9 recorded in January. The January boom appeared to re ect increased con dence after the alleviation, in part, of political uncertainty following the UK’s general election in late 2019. That con dence was, in common with much of global industry, at risk of being undermined by the coronavirus outbreak. Chris Williamson, economist at IHS Markit, commented, “Whether this expansion can be sustained in coming months is starting to look increasingly at risk. The survey data leave policymakers juggling between current signs of both improved economic growth and rising prices, while risks to the outlook have clearly intensi ed.” The PMI survey took place from mid- to late-February, before the potential impact of coronavirus became evident.

The global manufacturing sector

US manufacturing saw a February slowdown, exacerbated by COVID-19

The Institute for Supply Management’s (ISM) monthly review of the business climate showed that factory manufacturing activity in the United States slowed during February. New orders and contracts were fewer, possibly a result of the coronavirus spread, which by March was fuelling nancial market fears of a recession. The ISM said its index of national factory activity fell to a reading of 50.1 in February, lower than economists had anticipated, from 50.9 in January. A reading above 50 indicates expansion in the manufacturing sector, which currently accounts for 11 per cent of the US economy. The ISM index rose above 50 in January, for the rst time for ve months, following an easing of the China-USA trade tensions, but coronavirus (COVID-19) presented a new threat to factories. It was a blow, as some Federal Reserve factory surveys had indicated a stabilisation in manufacturing during the year. At time of writing, nancial markets are concerned that coronavirus could derail the longest economic expansion on record, now in its 11 th year. The ISM’s new orders sub-index dropped to a reading of 49.8 in February, compared to 52.0 in January. Export orders also fell in February, after January saw them reach their highest level since September 2018. Manufacturers reported paying less for raw materials and resources, while the factory employment index fell to 46.9 in February, suggesting manufacturing payrolls would remain weak following declines in December and January. After ending 2019 on a low, there were signs of optimism for German manufacturing In the Munich-based Ifo Institute for Economic Research’s Business Climate Index for February 2020, German business reported higher morale than of late. The new optimism slightly eased the fears of recession in the German economy, which slowed in the fourth quarter of 2019 after private and state spending weakened, and re ected an improvement in the manufacturing sector, which had witnessed a fall in exports. The Ifo Institute announced that the February reading rose to 96.1 – from 96.0 in January – which compared favourably against a Reuters forecast that it would drop to 95.3.

Image: www.bigstockphoto.com Photographer Adrian Grosu

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May 2020