Drop in German orders sign of slower global fixed investment growth

by: Aline Schuiling

  • Foreign orders for German capital goods have plummeted since the start of the year …
  • … signalling slower global growth in investment in machinery and equipment
  • We think that investment growth in the main countries and regions on aggregate is close to its peak levels currently, and that it will slow down moving into 2019
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German capital goods orders have plummeted

The volume of orders for Germany’s manufacturing companies has dropped since the start of this year. The weakness is concentrated in orders for capital goods, particularly orders from abroad. Although capital goods orders are notoriously volatile due to the impact of big-ticket items, the drop since the start of the year is too persistent and significant to blame normal patterns of volatility. Indeed, the seasonally adjusted index returned to a level below 100 in July. The yoy growth rate in the volume of foreign capital goods orders has turned negative in July (-5%) for the first time since early 2016.

German orders tend to track changes in global investment

Germany’s machinery goods industry is very export orientated. Around half of Germany’s goods exports consists of machinery and transport equipment. To assess the relationship between Germany’s capital goods orders and global non-residential fixed investment, we have constructed a weighted average aggregate growth rate in investment in machinery and equipment in the main industrialised countries and regions; the eurozone (excluding Germany), US, China, Japan and the UK. Together these countries make up around half of global GDP and have a share of almost 65% in Germany’s goods exports. It turns out that changes in growth in Germany’s orders track global trends in fixed investment quite well and that changes in orders growth tend to lead changes in fixed investment growth.

Global investment growth probably at peak levels now ..

Investment in machinery and equipment has been expanding solidly during the past few years. In the US, it has bounced back sharply after the energy-sector related decline in 2016. In China it has decelerated after Q1 of this year, but policy stimulus that has been implemented since then should result in a pick-up in the coming quarters. In the eurozone it has expanded at a stable rate of close to 6% in the past few years. In Japan, investment growth has accelerated since the start of this year, which is partly related to the 2020 Olympics and, therefore, temporary. Looking forward, we expect this weighted average measure of aggregate investment growth to remain close to current levels during the rest of this year, but to slow down noticeably moving into 2019. It should ease from its current level of close to 6.5% yoy, to around 4.5% on average in 2019.

… slowdown expected and risks to the downside

The expected slowdown in aggregate fixed investment in machinery and equipment is concentrated in the US. This would reflect normalisation after the sharp rebound since 2017, tighter financial conditions and the waning of the impact of the fiscal stimulus. Also, anecdotal evidence is that companies are scaling back investment plans due to worries about the trade conflict. In the UK, where investment growth was already subdued in the past few quarters, we expect a further moderation next year due to the uncertainties related to Brexit. In the eurozone, investment in machinery and equipment will continue to be supported by solid profit growth, low interest rates and rising capacity utilisation for a while. We expect growth to remain close to the current levels during most of next year. Uncertainties related to the global trade conflict and Brexit mean that the risks to investment growth in all countries and regions are tilted to the downside.