- Germany’s industrial sector gains pace, with output and orders higher…
- …adding to evidence that a gradual eurozone recovery is taking shape
- EM currency slide closely related to commodity price slump, but further weakness ahead
German industry gains pace following sluggish Q2 and Q3
Germany’s industrial sector has gained pace moving into the final quarter of the year. Industrial orders jumped by 2.5% mom in October, following a 1.1% rise in September, while industrial production rose by 0.2%, following 1.1% in September. The detailed orders data show that domestic orders were the strongest in October (+ 5.3% mom), with domestic orders for capital goods surging by almost 9%. Capital goods orders are notoriously volatile, but on a 3 months-over-3 months basis, they clearly bottomed out this summer and have picked up since then. This bodes well for fixed investment in Germany. Indeed we expect fixed investment, which contracted by 2.3% qoq in Q3, to bounce back in the coming quarters on the back of solid profitability and an improved business climate.
Eurozone economy to have picked up as well in Q4
Besides Germany, we expect that the eurozone economy as a whole picked up somewhat in the final months of the year. Business confidence in France, Italy, Belgium and the Netherlands, as well as Germany’s Ifo business climate, rose in October-November, following declines in the two months before. Indeed, the weaker euro, the decline in oil prices and the stronger international economy should support the eurozone economy in the coming quarters. We think that the consensus forecast for 2015 has become too pessimistic.
Slide in commodity prices drag down EM FX
Our emerging market currency index – that tracks the dollar versus a broad range of EM currencies – has risen by more than 7% so far this year. This reflects that emerging market currencies have fallen sharply against a generally reviving US dollar. What explains the slide? For starters, weakness in commodity prices have hurt currencies of emerging market commodity exporters. Russia is a prime example here. In addition, the substantial weakness in the yen has hurt Asian emerging market currencies. For example, South Korea and Taiwan were hurt by the sell-off in the yen, because these economies export similar products to Japan. Therefore yen weakness led to heightened fears about their competitive position. Last but not least, the more general rise in the US dollar and the prospect of higher US interest rates in 2015 have also been negative forces for EM currencies. Going forward, oil prices may soon find a bottom and firm, while base metals should be supported by the positive momentum in global growth. However, we expect, the yen slide to continue in the coming years and the US dollar to rally. As a result, the strong negative momentum in EM currencies may fade in the near term. However, it is likely that the general weakening trend these currencies against the dollar will continue over the next year, albeit at a slower pace.