Germany’s Fourth Quarter Was Weak - What This Means For The Eurozone As A Whole

Following the economy in Germany recently, I’ve felt like I’ve been riding a roller coaster. Unfortunately, the ride seems to have taken on a downward trend as early data from the fourth quarter has started to raise concerns. Early industrial data shows that private sector growth slowed to its weakest growth in 18 months. Today, we’re going to take a close look at the data that’s been released so far, discuss what this means for the Eurozone as a whole, and of course take a look at what we can expect from Germany and the rest of the Eurozone throughout the year 2015.

The Data That Has Economists Concerned

Over the past month or so, economists have been talking about all the good things Germany has had going for them. With oil prices on a steep decline, lower energy costs mean money for other sectors. Also, with a weakening Euro, economists expected companies selling to areas outside of the Eurozone would get a decent push. Unfortunately, neither of these expectations proved to come true. Unfortunately as construction and energy production fell, so too did the industrial output we saw from Germany.

While we did expect to see a minor drop in exports, seasonally adjusted expert figures dropped by 2.1% in November; a much larger fall than what was previously expected. Also, when we look at industrial output figures as a whole, we saw a drop of 0.1%; an early indication that the expectation of 0.2% growth in the final three months of the year was most likely an expectation that won’t come to fruition.

As this data was released, Markit Economics released PMI data that wasn’t favorable either. They announced that a Purchasing Managers Index for manufacturing and services fell from 51.7 in November to 51.4 in December; a far cry from the increase economists expected to 52.3.

What This Means for the Eurozone as a Whole

I’ve said it time and time again, and I’m happy to repeat myself; when the economic conditions in Germany weaken, we can expect to see a domino effect throughout the Eurozone. The bottom line is that while Germany doesn’t account for the movement in the entire Eurozone, it is the currency zone’s largest economy. Therefore, if Germany isn’t doing well, it provides a clear indication that the rest of the data seen around the Eurozone will follow. With most major economies in the Eurozone struggling, the poor data out of Germany could be the devastating blow that forces the ECB to start taking action in an effort to stimulate the economy.

What We Can Expect From Germany In The Near Future?

While we are seeing a bit of bad news now, economists seem to agree that we will start seeing growth throughout Germany in the near future. Banking on low energy costs and positive German output figures, BayernLB economist Stefan Kipar had the following to say

“…The indications are that gross domestic product growth was positive again in the fourth quarter...We’re assuming that German output will continue its positive trend in the coming months. Low energy prices will boost consumers’ purchasing power and exports will benefit from the weak Euro this year. The economy should gather momentum during the course of 2015.”

I agree that Kipar makes a very compelling argument; however, I’m not sold that lower energy costs will be enough to generate the momentum we need to see out of the German economy. Personally, I would argue that if the ECB doesn’t do something to stimulate the economy over the Eurozone, the slight stimulus that low energy costs might provide simply won’t be enough to help Germany shift things into a positive direction.

Final Thoughts

Germany and the rest of the Eurozone are in a relatively tough position right now. While low energy costs may help in some sectors, they will prove to be a burden in other areas. I hope to see the rest of the fourth quarter data come out in a positive light; however, I think we’re in for a bit of a disappointment. I’ll keep you posted as new data becomes available!

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Anyoption 7 years ago Author's comment

Hi Dick! It hard to know. It may be that the Euro as a single currency is doomed. The Euro zone needs a boast of some kind.

Alexis Renault 7 years ago Member's comment

Yes, I'm betting the euro is doomed.

Dick Kaplan 7 years ago Member's comment

What, if anything, do you think could turn the tide?