Market participants in the week ahead will receive an update on Germany’s manufacturing sector, amid fears the EU’s growth engine has sputtered into recession.

The familiar refrain of European headwinds, including U.S.-China trade tensions, uncertainties over an ultimate resolution to Brexit, as well as trade-related tariffs and revised auto emissions standards, has generally battered Germany’s industrial sector and export health.

German business activity has been languishing, alongside weak services growth, low levels of factory output, declining new orders and a deterioration in parts of its labor market.

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Germany’s Association for Supply Chain Management, Procurement, and Logistics (BME) noted that “the manufacturing industry of Europe’s largest economy is in a worse state than it has ever been since the global financial crisis.”

The IHS Markit/BME-Einkaufsmanager-Index (EMI) fell by 1.8 points to 41.7 in September compared to the previous month, marking the ninth consecutive month of contraction, and its lowest level since June 2009.

BME said the decline in order intake was the main reason for the fall in production rates in September, according to its survey participants. It continued that many of the managers surveyed associated this with “a high degree of uncertainty, leading to cancellations, postponements or reductions in orders.

“The automotive industry and mechanical engineering were particularly affected.”

Meanwhile, industrial job cuts accelerated in September, reaching levels not seen since January 2010.

A more recent IHS Markit flash Eurozone Purchasing Managers Index (PMI) for October signaled a second straight month of declining German business activity, underlining the “worst period of decline” since 2012.

According to IHS Markit, new orders continued to “drop sharply, and employment fell for the first time for six years.” Also, the rate of loss of factory output “eased but remained among the steepest since 2009,” while services growth was “the weakest since September 2016, as new business fell at the steepest rate for over six years.”

Prometheus in Chains

The environment does not bode well for many of Germany’s industrial titans, already mired in global uncertainties that have spurred weaker sales and darker outlooks.

BASF

Chemical giant BASF (OTCMKTS: BASFY), for example, recently highlighted a long list of global woes that have taken a toll on Europe’s export-oriented countries, as well as the U.S., in the third quarter of 2019, including escalating trade conflicts, Brexit, slowing Chinese industrial growth, a further sinking of the global auto industry, declining oil prices and a weaker euro versus the U.S. dollar.

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Among its Q3 2019 financial results, BASF Group posted a 2% year-over-year decline in sales to €15.2bn on the back of lower revenues in its materials and chemicals segments, while EBIT before special items plunged 24% from the prior-year quarter to €1.1bn.

The lower intake from its operating activities has led to some blockage in the firm’s free cash flows, which fell to €1.07bn from €1.95bn in the prior-year quarter.

BASF also said that as it does not expect to see “any recovery in global economic activity in the fourth quarter,” it anticipates a slight decline in sales in 2019, a fall in EBIT before special items of as much as 30% year-on-year, and a “[c]onsiderable decline in return on capital employed (ROCE).”

Automakers: Daimler & VW

Meanwhile, German carmakers have also been reeling about the adverse effects of geopolitical volatility and slowing global growth.

Mercedes-Benz-maker Daimler (OTCMKTS: DMLRY), for instance, said it expects the world economy to have grown by only about 2.5% in Q3 2019, amid further indications of industrial weakness, while uncertainties over China’s ongoing trade conflicts with the U.S. generally led to “restrained” Chinese consumption and investment.

In fact, in its October World Economic Outlook (WEO), the International Monetary Fund (IMF) lowered its global growth outlook to 3.0% for 2019, its lowest level since 2008–09 and a 0.3% downgrade from its April 2019 WEO.

Furthermore, Daimler noted that the worldwide car market showed “no significant recovery” in Q3 2019, albeit the decline was smaller than in the two previous quarters. The firm observed that global demand was “once again slightly below the prior-year level,” with a continued negative impact from China.

The firm posted Q3 2019 revenue of €43.3bn, up from €40.2bn in the same year-ago quarter, with an increase in group EBIT to €2.7bn from €2.5bn in Q3 2018.

At €1.8bn, net profits were flat year-on-year, while Daimler’s free cash flow was also dented, falling to -€500m in Q3 2019 from -€60m in the same year-ago quarter.

The firm anticipates its total unit sales in 2019 will be about on par with the previous year, and while revenue growth may pick up, it expects group EBIT to be “significantly lower” than 2018.

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Volkswagen (OTCMKTS: VWAGY) also held a gloomy outlook for 2019, noting that despite its recent gain in market share, it expects vehicle markets will “contract faster than previously anticipated in many regions of the world,” and given this situation, it downwardly revised its views on customer deliveries to be flat with the prior year from a previously expected “slight increase.”

The company said it expects sales revenues to rise by as much as 5% over the prior year.

Between January and September 2019, Volkswagen’s sales revenue grew by 6.9% year-on-year to €186.6bn, while Operating profit before special items spiked 11.2% to €14.8bn, which it mainly attributed to improvements in the mix and fair value on derivatives.

Stock Prices Betray Bleakness

Although Germany’s economic landscape seems bleak, recent accommodation by the European Central Bank (ECB), along with Volkswagen’s better-than-expected Q3 2019 financial results, may have helped some equities and exchange-traded funds (ETF) regain some ground.

The iShares MSCI Germany ETF (NYSEARCA: EWG), for example, which includes among its top holdings BASF, Daimler and Volkswagen, as well as software producer SAP (NYSE: SAP), financial sector firm Allianz (OTCMKTS: AZSEY) and industrial manufacturer Siemens (OTCMKTS: SIEGY), has catapulted off its latest one-year trough.

The ETF has risen roughly 20.92% since its most recent 52-week low set December 24, 2018, according to the IBKR Trader Workstation. Germany’s DAX index has also tacked-on nearly 23% year-to-date.

The Road Ahead

Looking ahead, IHS Markit economist Joe Hayes noted that September industrial output data will be eyed to gauge whether Germany has managed to avoid recession.

He pointed out that the country’s worsening state of manufacturing output suggests “heightened recession risks persist for Germany.” Hayes added that he expects “a small quarterly contraction” in gross domestic product (GDP) for Q3 2019, and trade and factory orders data will “also provide insight into demand conditions.”

Germany’s economic calendar in the week ahead includes:

Monday, November 4

• IHS Markit Manufacturing PMI (Final – Oct)

Wednesday, November 6

• Factory Orders (Sept)
• IHS Markit Services PMI (Final – Oct)
• IHS Markit Composite PMI (Final – Oct)

Thursday, November 7

• Industrial Production (Sept)
• IHS Markit Construction PMI (Sept)
• IHS Markit Composite PMI (Final – Oct)

Friday, November 8

• Trade Balance (Sept)

Market participants will also see a sea change at the ECB, with the introduction of former IMF head Christine Lagarde as its new president, replacing Mario Draghi at the helm.

Lagarde had been appointed by the European Council on October 18 for an eight-year term as the central bank’s leader, and many in the market expect her to lean more heavily on some EU Member States’ political leaders to step-up fiscal responsibility for the euro area’s ailing economy and stubbornly low inflation.

Investors will also likely be paying close attention to any number of developments in the long list of domestic and overseas geopolitical risks.

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