German Economic Sentiment is on a date with new disappointment
Germany's ZEW Economic Sentiment jumped to a sharp rise in September 2019, after the August reading, which was the worst reading since December 2011. It came in at -22.5, showing a 21.6-point rise compared to the previous month. Therefore, the indicator appears approximately at the same level as the July reading, which was at -21.1 points. This reading shows September reading at a better level than the market's average forecast at -37.00, as analysts' fears dominated their expectations regarding the intensification of the US-China trade war. But let's wait a bit, as the September reading is still well below the 21.5-point long-term average.
Looking at the reading of the indicator historically, we notice that the indicator is moving in a downtrend, which is exactly in line with the reading of the German manufacturing PMI, which recorded its worst performance since the end of the global financial crisis, as the latest PMI data showed on October 1st, The decline comes as the pace of contraction in production and new orders accelerates. Besides, there was a drastic drop in job opportunities, with German factory employment falling to its lowest level in almost a decade, according to the IHS Markit and BME indicator.
The attached chart shows the IHS Markit / BME Germany Manufacturing PMI - the worst performance of the German manufacturing sector, drawing on the pessimistic outlook for new orders, production, employment, supplier deliveries and procurement quotas - to 41.7 in September, down from last reading. The same indicator in August was at 43.5, the lowest reading since June 2009.
Analyses by the preliminary industrial group showed that investment goods were the worst performers during the month, followed by intermediaries. Unfortunately, in the September survey, consumer goods producers joined other groups of producers in recording deflation.
Concerning production, September witnessed a remarkable acceleration in the decline of production for the eighth consecutive month at the fastest rate since July 2012. This production shrinking was accompanied by an accelerated decline in new orders, bringing new orders to the lowest level since April 2009. By entering into the details of the survey on the reasons for these declines, Companies reporting a drop in new business commented on customers postponing orders, reducing the number of orders, and in some cases completely cancelling orders, often behind uncertainty about future expectations.
With regards to the German industrial workforce, the pace of layoffs has accelerated at the fastest pace since January 2010. It is very important to point to a decline in manufacturing employment for seven consecutive months, with the recent wave of job losses again focusing mainly on contractors, It is indeed worrying that manufacturers have shown a growing willingness to reduce the number of workers during the last survey, which raises serious concern that this will reflect on German consumer confidence and weigh heavily on the German economy.
Therefore, the ZEW Economic Sentiment reading is expected to see a new decline as the PMI Manufacturing and ZEW sentiment indicator are historically linked to largely consistent performance.
For those who do not know:
Germany's ZEW Economic Sentiment survey measures analysts' optimism about the expected economic developments over the next six months. The survey covers up to 350 financial and economic analysts. The indicator is designed to represent the difference between the percentage of optimistic analysts and the percentage of analysts who are pessimistic about the development of the economy. Therefore, the ZEW confidence indicator appears on a scale from -100, which is mean all analysts expect the economy to deteriorate- to 100, which says all analysts expect the economy to improve. Therefore, logically, a value of 0 indicates that the number of optimistic analysts equals the number of pessimistic analysts.