Market participants in the week ahead can expect further data on Germany’s hard-hit economy, as virus-inflicted containment measures continue to stymie the EU’s growth engine, crushing its auto and engineering industries.

The fallout from the coronavirus pandemic has generally crushed global expansion prospects, with widespread outbreaks hampering service and manufacturing sectors across the globe.

The International Monetary Fund (IMF) noted in its latest World Economic Outlook (WEO) that it anticipates a sharp, -3% contraction in the world economy in 2020 as a result of the coronavirus pandemic, “much worse” than during the 2008–09 financial crisis.

Growth in the Germany is expected to contract -7.0%, on par with other European nations such as France (-7.2%) and the UK (-6.5%), while countries such as Italy (-9.1%) and Spain (-8.0%) are likely to fare worse. Meanwhile, although countries in other regions such as the U.S. (-5.9%) and Japan (-5.2%) may weather the storm somewhat better, their growth picture also remains grim.

The IMF added that Germany’s fiscal response, along with other affected European countries, including France, Italy, Spain, and the UK has been “swift and sizable.”

Both Germany and Spain, for example, have introduced temporary interest-free tax deferrals, suspended enforcement of some debt contracts, and implemented targeted cash transfers for the self-employed, as well as small and medium-sized enterprises (SMEs).

Moreover, Germany and France have each helped buoy they labor markets by easing and expanding firms’ access to subsidized short-time work programs to preserve jobs and workers’ incomes. Germany, Italy, and Spain have also offered guarantees on loans for firms.

Against this backdrop, however, Germany’s consumers and businesses continue to suffer mounting pessimism, while manufacturers and engineers – arguably the heart of the country’s economic heartbeat – appear to face steep earnings declines as COVID-19 weighs heavily on activity.

Shares of the iShares MSCI Germany ETF (EWG), which includes among its top holdings software producer SAP (SAP), financial sector firm Allianz ( AZSEY) and industrial manufacturer Siemens (SIEGY), plummeted nearly 41.65% over just a three month period – from their latest 52-week peak on January 21, 2020 to March 18, 2020.

Year-to-date in 2020, SAP’s stock has fallen close to 9%, while Allianz and Siemens have shed around 33.25% and 21.7%, respectively.

To date, more than 2.1m cases of the novel coronavirus have been identified in 185 countries and regions, with around 6.42% of that total having hit Germany and almost 31% in the U.S., while over 140k people have suffered fatalities globally, according to data compiled by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University.

Frostbitten Business Climate

Many in the market widely anticipate business sentiment to weaken dramatically in April, after, the ZEW Indicator of Economic Sentiment for Germany plunged by 58.2 in March to -49.5 – its largest month-over-month drop since the survey was started in December 1991. 

The assessment of the economic situation in Germany also worsened materially, with the indicator pointing to -43.1 – a whopping 27.4 points lower than in February.

According to ZEW, the combination of strongly negative values for both the economic sentiment and the assessment of the current situation has only been witnessed once – during the financial crisis in the fall of 2008.

ZEW president Achim Wambach said that Germany’s economy is “on red alert,” as the financial markets expect to see a decline in real gross domestic product (GDP) in the first quarter, while also considering a further drop in Q2 to be “very likely.”

Meanwhile, several German industries are likely to feel significant pressure on earnings amid the pandemic, including autos and mechanical engineering, as well as banks and the steel sector, while demand during this period may spur more positive impacts on pharma companies, IT, telecoms, and businesses related to consumption and trade.

Economists surveyed by Bloomberg generally foresee further carnage in the ZEW’s indicators for April, when the next survey is released Tuesday, April 21. Most think expectations are likely to come-in around the -65 mark, while the current assessment figure may decline to -51.5.

The gloom pervading business sentiment was also confirmed by ifo, which said that the mood among managers has become “extraordinarily dire,” with the German economy in “shock,” in part as expectations tumbled to their lowest level since the country’s reunification.

The ifo Business Climate Index collapsed from 96.0 in February to 86.1 in March – the steepest fall ever recorded since the East reunited with the West and the lowest value since July 2009.

Conditions could well worsen, with many foreseeing a further drop in the index to 80 in April, while expectations may drop to 75 from 79.7 in March, and the current assessment to 82 from 93.0. These indices are set for release Friday, April 24.

Consumer Discomfort

With fears about a recession looming, as well as incomes running dry, consumer spending is likely to shrivel.

Indeed, GfK noted that COVID-19 is having an “enormous” impact on consumer sentiment in Germany, with both economic and income expectations, as well as the propensity to buy, expected to suffer “heavy losses.”

Germany’s entire retail sector is likely to continue to face mammoth challenges, as sales are sapped by containment measures. Also, while the coronavirus has generally helped boost drug and grocery stores with a 14% year-over-year revenue jump, amid rampant stock-piling, uncertainties over the financial well-being of these firms in the medium and long-term persist.

GfK retail analyst Robert Kecskes said that the “‘shut-down’ of public life is not only leading to stock-piling, but also to a relocation of out of home consumption to people’s private homes, causing an increase of sales in grocery stores compared to the previous year.”

However, Kecskes added that there will likely be “an increased sense and need for local communization and assistance after the corona crisis,” as many households will “end up in precarious situations and will become reliant on social welfare,” which the drug stores and grocers should prepare for.

GfK said it foresees a paltry figure of 2.7 for April 2020, 5.6 points lower than March, and some market participants think conditions could deteriorate much further – to a potential level of -2.3 for May, when the updated gauge rolls out Thursday, April 23.

Eyes on Flash PMIs

As consumer spending becomes increasingly stifled by social-distancing practices such as ‘shelter-in-place’ and ‘self-quarantines,’ Germany’s service sector – not unlike the U.S., the UK and many other nations – has seen mass closures of hotels, restaurants and bars across the country.

In fact, the latest service sector Purchasing Managers’ Index (PMI) from IHS Markit posted a record month-on-month fall in March, plummeting from 52.5 in February to 31.7 — the steepest drop in activity since the survey’s inception in June 1997, and eclipsing the previous low of 41.3 set in February 2009.  

In consensus with ZEW and ifo, IHS Markit’s and BME’s latest PMI showed further evidence of the deadly respiratory illness having battered Germany’s manufacturing industry. The latest reading reflected “steep and accelerated falls” in both output and new orders, driven by growing weakness in international demand and increased supply-chain disruption.

In fact, the headline manufacturing PMI figure for March saw the sector fall from February’s 13-month high of 48.0 to 45.4 – the greatest extent in nearly 11 years.

IHS Markit economist Phil Smith said that “there’s scope for the numbers to get even worse before they get better, as most containment measures and factory shutdowns happened either during or after the survey data were collected [12-24 March].”

He added that investment goods producers were “the biggest losers in terms of both output and new orders.”

Indeed, a sharp drop in output across investment goods – which include autos and machinery equipment – led the decline in March production to its steepest fall since April 2009. IHS Markit said this category was the worst-performing during the month, amid reports of plant closures and “heightened uncertainty hitting demand for capital goods.”

Many German auto companies, which have long been struggling to comply with stricter emissions regulations, have further experienced virus-inflicted losses on their equity values.

Year-to-date in 2020, shares of Volkswagen (VLKAF) have fallen around 24.4%; Daimler’s (DDAIF) stock has shed nearly 44.4%; and shares of BMW (BAMXF) have dropped roughly 32.6%.

Unsurprisingly, auto manufacturers have been generally eager to jump-start their facilities and resume business-as-usual production.

VW, for example, recently said it has been preparing to gradually get its factories back in gear, amid certain German federal and state government decisions, as well as a loosening of virus-related restrictions in other European states.

The company said that production will first recommence in the week ahead at its plants in Zwickau, Germany and Bratislava, Slovakia, then the remainder of its domestic operations, as well as its facilities in Portugal, Spain, Russia and the U.S. are to set to restart in the week of April 27.

VW added that production throughout May will be resumed successively in South Africa, Argentina, Brazil, and Mexico.

Meanwhile, economists generally anticipate a further downturn in the preliminary April readings of both the IHS Markit/BME manufacturing PMI and the IHS Markit service PMI, with declines to 39 and 30, respectively, according to Bloomberg surveys.

On the Economic Calendar:

Monday, April 20

• PPI (Mar)

Tuesday, April 21

• ZEW Economic Sentiment Survey (Apr)

Thursday, April 23

• GfK Consumer Confidence (May)
• IHS Markit/BME Germany Manufacturing PMI (Flash-Apr)
• IHS Markit Germany Services PMI (Flash – Apr)
• IHS Markit/BME Germany Composite PMI (Flash-Apr)

Friday, April 24

• IFO Business Climate (Apr)
• IFO Expectations (Apr)
• IFO Current Assessment (Apr)
• Import Price Index (Mar)

Investors concerned with Germany’s economic and financial well-being will most likely be eyeing the critical data releases in the week ahead for further developments on the trajectory of the country’s recovery.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.