Morning Must-Read: Gavyn Davies: Germany Is Stalling

Gavyn Davies: Germany Is Stalling: “Extremely weak German industrial production figures…

…for August have come an awkward time for the German government…. The official German line heading into these meetings is that the recovery is proceeding well, both in Germany and in the euro area as a whole, implying that the recent marked weakening in both GDP and inflation data is just a temporary aberration. There is no sign that the Merkel administration is ready to change its longstanding formula for economic success in the euro area: member states should stick to the fiscal targets in the Stability and Growth Pact, and should accelerate structural reforms, so that the expansionary monetary stance provided by the ECB can bear fruit…. This could change, however, if the German economy itself continues to weaken significantly. But how likely is this to happen?… The Fulcrum ‘nowcast’ models… activity growth rate has slowed from about 2.6 per cent in late 2013 to 0.9 per cent now…. It has not fallen yet into negative territory on an underlying basis, but it is certainly not acting as a powerful locomotive for the European economy. Far from it…. The Q2 official GDP growth rate of -0.6 per cent was already worse than had been expected…. The central estimate of the latest ‘nowcast’ for Q3 is that the GDP growth rate will rebound to 1.4 per cent annualised… about a 28 per cent probability [of a second negative number].”