Home German PMIs did NOT forecast Q2 contraction – recession

German PMIs did NOT forecast Q2 contraction – recession

The euro was cheered by the fact that  German  manufacturing PMI beat expectations and returned to growth territory: 51.8 points – above 50 that separates growth and contraction. But does this really imply that Germany is out of the woods and can avoid a recession?

Not at all.

First of all, the data refers to October, which is in the fourth quarter.  The  widespread  definition of a recession is two consecutive months of GDP contraction.  The German economy contracted by 0.2% in Q2 and could still report a contraction in Q3,  showing that the so-called locomotive is in recession.

Yet more importantly, we have to remember that purchasing managers’ indices are “soft data” – they are  useful as  indicators for the future, but they are not the “hard data” – what actually happened.

And they are not always correct.

They were  specifically wrong for Germany, and in recent past of Q2 2014, not in the history books.

Let’s look at Q2:

  • Markit’s final  manufacturing PMI stood on 54.1 points in April, 52.3 in May and 52 points in 52 points in June. The average for Q2 is therefore 52.8 points.
  • The final services PMI stood on 54.7 in April, 56 in May and 54.6 points in June. The average here is 55.1 points.

And Q3:

  • Manufacturing: July: 52.4, August: 51.4 and September 49.9 points. Average: 51.2 points – a drop of 1.6 points.
  • Services:  56.7 in  July, 54.9 in August and 55.7 in September. The average: 55.8 points – a rise of 0.7 points.

While the services sector improved, it wasn’t enough to beat the big fall in  manufacturing, and for an industrial powerhouse, industry matters more.

So, we can conclude that if Germany contracted on the background of better PMIs and they dropped in the following quarter, contraction prevailed also in Q3 and Germany fell into a recession.

And even if manufacturing PMI for the first month of Q4 is better than the Q3 average, it is still below the average for Q2.

Of course, the PMIs could be wrong to the other side this time, and the hard data could beat the soft data, but with so much gloom in Germany (if we look at the negative business confidence as well as a downgrade in official economic forecasts), a scenario in which Germany leaps back to good growth seems like wishful thinking.

What do you think?

More:  EUR/USD: Sell Bounces For 1.22 In 3-Months, Range Trade S/T – Danske

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.