An October 13th report from Credit Suisse Economics Research suggests that perhaps a real macroeconomic sea change is underway as the German industrial manufacturing giant enters a cyclical slowdown. Credit Suisse analysts Christel Aranda-Hassel and colleagues say that external factors are likely to erode Germany’s manufacturing sector over the next few quarters.

The analysts first point is that the recent August data indicating a sharp manufacturing slowdown and even a return to recessionary levels is a statistical artifact (Exhibits 1 and 2), and that manufacturing data are likely to bounce back over the next few months. That said, they go on to argue that a medium-term slowdown in German manufacturing activity is probable.

Germany

They note: “Reliable indicators do point to a slowdown in German manufacturing, in part driven by its hitherto successful capital goods sector. We’d attribute that to slower demand growth in Asia and a knock to exporters’ confidence from the imposition of sanctions on Russia.”

German economy biased towards exports

The Credit Suisse report notes that the German economy is highly biased towards exports and has a current account surplus valued at 7% of GDP. This dynamic has been a big part of Gemany’s relative economic outperformance. But the worms is turning and external demand is becoming less supportive.

Aranda-Hassel et al. highlight the short- and medium-term consequences of fading global demand to the German economy. “That points to a gradual erosion of Germany’s trade and current account surplus and, in turn, a headwind against German GDP growth from net trade.”

Slowdown in external demand is the key issue for Germany

Germany

The CS analysts point out recent economic data shows that most of the slowdown in demand for German goods/services is related to external rather than internal factors.

Germany

The report notes: “The extent to which the deterioration in growth seems concentrated in the external-facing sector (manufacturing), and external-facing economy (Germany) suggests to us that the source of the demand shock to production originated outside the euro area. Indeed, the data we have for retail and auto sales (Exhibit 7) suggest that the tepid but steady recovery in euro area consumer demand has continued.”