Manufacturing Slump Deals Another Blow to Europe’s Economic Outlook

Europe’s economic outlook was thrown into fresh doubt after reports showed weakness across France and Germany.

Hopes that the slowdown had reached a trough have taken a beating from renewed weakness in France and the deepest slump in German manufacturing in over six years. A euro-area Purchasing Managers Index is signaling growth of 0.2% this quarter, matching the pace of the previous three months.

The news reverberated through markets, sending Germany’s 10-year bund yield below zero percent for first time since 2016. Yields on Spanish, French and Italian debt also declined, while the euro dropped 0.6%.

Much of the source of the economic weakness appears to be external, with export orders — particularly in manufacturing — under pressure. Trade tensions, tariffs and weaker global growth are all taking a toll, with Germany feeling much of the pain. Japan, another export heavy economy, also reported a contraction in activity in its manufacturing sector on Friday.

There’s “uncertainty with regards to Brexit, diesel-gate fallovers in the German car economy and also a slowdown in the Chinese economy,” said Mark Burgess, who helps oversee about 431 billion pounds as chief investment officer for Columbia Threadneedle Investments in Europe. “All of that is weighing heavily on the prospects for European growth.”

The European Central Bank has already responded to the deteriorating situation by cutting its forecasts, prolonging record-low interest rates and offering new cheap loans to banks.

But it’s also continued to emphasize the health of the domestic economy, saying lower unemployment, wage growth and easy financing conditions are helping demand. The big question is whether that can persist through a protracted downturn that may ultimately feed through to sentiment, damaging spending and investment.

What Bloomberg Economics Says:

“This disappointing reading raises the risk that euro-area growth failed to recover decisively in the first quarter, after last month’s rebound had provided a glimmer of hope that 2019 was starting on a stronger footing.”

–Maeva Cousin
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The ECB isn’t alone in changing tack. The Federal Reserve this week took another dovish step, indicating its pause on interest-rate hikes will last longer than initially planned. Other central banks across Europe and Asia are mostly on pause, taking time to see how the compendium of risks pan out.

European policy makers may have even more reason to worry than the Fed given the region is more exposed to weaker trade and a bad Brexit than the U.S. and its financial sector is not as robust, said Steve Barrow, head of currency strategy at Standard Bank in London.

“The bottom line is that if anyone should be fretting right now it should really be policymakers at places like the ECB,” Barrow said in a report to clients on Friday.

IHS Markit, which compiles the PMI, said if the weakness persists into the next quarter, it may leave the euro-zone economy struggling to grow by much more than 1 percent this year. The ECB currently sees growth averaging 1.1% in 2019. That’s in line with the consensus in Bloomberg’s March survey of economists.

“The bloc’s economic problems are far from over,” said Bert Colijn, euro zone economist at ING. “To fire on both cylinders again, the euro zone seems to require the global growth outlook to improve. Unfortunately, uncertainty is continuing into April with many of the global growth concerns still undecided.”