Global Daily – Germany’s orders signal weak global capex

by: Aline Schuiling , Bill Diviney

Euro Macro: Germany’s industrial contraction continues moving into 2020  – Orders received by Germany’s manufacturing companies fell by 2.1% mom in December, following upon a 0.8% decline in November. Whereas domestic orders rose by 1.4%, foreign orders dropped by 4.5%, with orders received from other eurozone countries plummeting by 14% mom and orders from outside the eurozone increasing by 2%. Having said that, monthly orders data tend to be very volatile, particularly monthly capital goods orders, which can be distorted by bit-ticket items. Looking at the less volatile quarterly growth data, it turns out that total factory orders fell by 0.6% qoq in Q4, only slightly better than the -0.8% that was recorded in Q3. The detailed data shows that the weakness in Q4 was concentrated in capital goods orders, which fell by -1.5% qoq, after a 0.6% decline in Q3. This is in line with our view that global fixed investment growth will slow down in the next few quarters. Domestic capital goods orders fell by almost 3% in Q4, and capital goods orders from countries outside the eurozone dropped by almost 5%. Orders for capital goods from eurozone countries were stable in Q4, but this was due to a one-off 20% monthly jump in October. As a result of subsequent falls in these orders in November and December, the statistical overlap for 2020Q1 is -7%. All in all, the orders report shows that the malaise in Germany’s industrial sector has continued moving into 2020, and even before the potential negative impact of the outbreak of the coronavirus in Asia. (Aline Schuiling)

US Macro: Labour costs continue to go nowhere – Unit labour cost growth fell back in Q4 to 1.4% qoq annualised, down from 2.5% in Q3. While quarterly ULC growth is highly volatile – depending as it does not just on wage growth and other employee costs, but also productivity growth – the broad trend continues to be subdued. Cutting through the quarterly volatility, ULCs are growing at around 2% yoy, well below the 2.5-3% level that would be needed to push core inflation meaningfully higher. At the same time, wage growth has been softening, with average hourly earnings growth falling to 2.9% as of the December reading – down from a peak of 3.4% back in February (January data is due tomorrow as part of the payrolls report). As such, the prospects for an acceleration in ULC growth also look rather weak. Given the slowing in the economy, we are unlikely to see the kind of higher-pressured labour market tightness we saw in 2018 again anytime soon, and so wage growth is also unlikely to rebound significantly. Combined with weaker shelter inflation, this poses downside risks to overall inflation, supporting our call for a further rate cut by the Fed in H1 2020. See our US Outlook for more on the labour market and inflation prospects for this year. (Bill Diviney)