Reality Check: Germany Cannot Carry the Euro Alone, Contraction Arrives

Germany appears to be getting sucked down by the endless holes in the smaller peripheral eurozone nations. It may be too soon to say that Germany is definitely going into recession, but the risks are not just present, they are growing. And that spells bad news for European growth and the nations that depend on them.

The private sector in Germany managed to show contraction in April for the first time since November. If you just look at our list of nations with the highest unemployment rates, you will see how many peripheral countries in Europe are sucking the life out of the stronger nations there. Germany also suffers from the future shock of incredibly low birth rates. The composite purchasing managers’ index fell to 48.8 in April from 50.6 in March, and a reading of less than 50 implies contraction, or recession if it goes on too long.

The manufacturing sector continued to fall deeper into the red, posting a reading of 47.9 in April and 49.0 in March. What is scarier than all is that the services sector activity went into the red also, down to 49.2 in April from 50.9 in March.

On a broader eurozone basis, the eurozone PMI readings were even worse:

• Flash Eurozone PMI Composite Output Index at 46.5 in April, versus 46.5 in March
• Flash Eurozone Services PMI Activity Index at 46.6 in April, versus 46.4 in March, a two-month high
• Flash Eurozone Manufacturing PMI at 46.5 in April, versus 46.8 in March, a four-month low
• Flash Eurozone Manufacturing PMI Output Index at 46.3 in April, versus 46.7 in March, also a four-month low

Markit said, “Germany saw both activity and new business fall at the steepest rates for six months. The drop in German activity was also notable in being the first since last November.”

Eurozone GDP has dipped back into negative territory. France recently said that austerity measures are hurting it and the nation is in recession. Obviously the PIIGS are still in recession, and Cyprus manages to remain a relevant drag on the financial headlines somehow. Here is why we are growing more concerned about the whole of Europe after Germany:

Looking ahead, service sector companies’ expectations about activity levels in the year ahead fell to the lowest for four months. Meanwhile in manufacturing the orders-to-inventory ratio fell to the lowest for six months, suggesting firms may seek to cut production again in May.

Chris Williamson, Chief Economist at Markit said:

Although the PMI was unchanged in April, the survey is signalling a worrying weakness in the economy at the start of the second quarter, with signs that the downturn is more likely to intensify further in coming months rather than ease. … Thanks to an upturn in the survey at the start of the year, the PMI suggests that euro area GDP fell by around 0.2-0.3% in the first quarter after a 0.6% drop at the end of last year. However, the April reading points to a 0.4% rate of decline, with downside risks.

We already saw that Germany and other European nations have tempered their growth estimates for 2013. Perhaps they need to be addressing another year of recession rather than growth. Germany cannot carry the load alone, and even if it could there are cracks forming in the foundation.