August 30, 2019

News in Charts: Fathom’s sentiment indicators reflect grim outlook for German manufacturing

by Fathom Consulting.

Fathom’s Economic Sentiment Indicators (ESIs) distil the information contained within numerous surveys into composite measures of underlying sentiment. Since peaking at the beginning of last year, the euro area ESI has fallen sharply almost one percentage point as growth slipped and sentiment soured following 2017’s economic boom. The decline in sentiment over the past two years is remarkable, with the gap that emerged between the hard and soft data now fully closed. Fathom had expected this to happen, with weaker sentiment (rather than higher growth) always likely to be the cause.

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The turnaround in sentiment is particularly striking in Germany; Fathom’s whole-economy ESI fell to 0.0% in July, its lowest level since 2009, amid trade uncertainty and ongoing weakness in the manufacturing sector. Indeed, the German ESI’s manufacturing sector sub-component is now deeply in negative territory. The weakness in manufacturing sentiment is also reflected in hard data (such as the new orders report), which appear to offer an equally pessimistic indication of where production is likely to go from here.

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The deterioration in sentiment through 2018, and the early part of 2019, trailed behind falls in production, with firms perhaps slow to recognise the trade shock and hence its persistence. Given the importance of trade to German manufacturers, it is hardly surprising that growth, and subsequently sentiment, have been hit hard.

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Thus far, output in the non-manufacturing economy has remained relatively resilient which has limited the impact of the shock. However, if the manufacturing weakness persists and if it were to start spilling over into employment, then the downturn could spread to other sectors of the economy. Even if this does not happen, the relative importance of manufacturing to the German economy points to a high likelihood of a second consecutive quarterly contraction in GDP.

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