Sunday, July 6, 2014

Merkel goes to China to halt German economic slowdown

The yield spread between US treasuries and German government bonds hit a new high last week (see chart). Was this divergence in rates simply a response to the ECB action last month (see post) in combination with stronger jobs data in the US or is there more to it?

Part of the answer has been softer than expected economic data out of Germany. The nation that had pulled the euro area out of its recession has been experiencing some headwinds. Germany's recent expansion has been partially driven by exports - both to the Eurozone and to elsewhere. And while the nation's domestic demand remains relatively strong (see German retail PMI), weakness in exports is beginning to show.

Source: Barclays Research

Signs of this growth moderation have been visible for some time now, including the manufacturing PMI report (see chart), softening economic sentiment (chart below), and even weaker employment figures (see story). Most economists did not anticipate this, and some have attributed it to weaker growth in China.

Source: Zentrum für Europäische Wirtschaftsforschung GmbH (ZEW)

To be sure, German economic growth remains strong on a relative basis. Many also expect a better second half, as China's economy picks up (see chart). Some of this optimism comes from the fact that the US consumer is finally tapping those credit cards (see chart) and driving up imports (see chart). Moreover, the German government remains heavily focused on business expansion abroad, particularly given the recent slowdown (what a novel idea - a business-focused administration).
Xinhua: - Angela Merkel is paying another visit to China this weekend - her 7th trip to the Asian powerhouse as German Chancellor, leading a high-level economic delegation.

German analysts believed Merkel's trip is aimed at keeping the dynamic in the current Sino-German relations going further. Given that the bilateral economic relationship has quickly developed, economy is widely regarded as the focus of the chancellor's visit.

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