ECB rate hike coincides with a grim indicator for the German economy

Amid all the hand-wringing about ECB interest rate hikes this week and what they will do to the wider European economy, there was particularly bad news out of Germany on Friday.

Despite what you may think, business journalists generally try to avoid using lots of adjectives in news reports. “Show don’t tell” is a widely held mantra in the industry. Still, it’s okay to describe German factory orders data for March as awful, terrible, or really, really bad.

Factory orders data is seen as important as it is a leading indicator of economic activity. Usually the direction of factory orders will feed into overall economic growth or contraction, hence it is closely watched. The measure dropped 10.7 per cent in March, the biggest fall since the early days of the pandemic when global business essentially stopped for a couple of months. The drop was more than four times what economists had been expecting.

Given its size, Germany plays a huge role in whether the EU economy overall grows. The bloc looked like it would avoid a recession during the current slowdown, but now that question is firmly back on the table, despite the outsized influence of Ireland’s multinational-driven GDP growth.

Euro-zone business activity rises to 11-month high

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Investors factoring in growing chance of another Fed interest rate rise

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Interest rates may be coming down. That’s not entirely good news in a frothy property market

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ECB should not be afraid to ‘diverge’ from Fed on interest rates

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Economists pointed to the sharp rise in interest rates, with more likely to come, as the main reason for the drop off. This highlights perfectly the problem the central bank is facing. Should it keep going with rate hikes to tame inflation? Or pause and see if the increases up to now are enough?

[ ECB ‘not pausing’ rate hikes despite slowing pace, says Lagarde ]

[ Mortgage relief on agenda for budget after ECB rates rise again ]

It’s quite possible that the hikes are already transmitting through the European economy, but are only now showing up in the data. Of course, it’s also possible that is not the case. The big fear, as has been written in these pages before, is the ECB moving too far too quickly, and choking off activity across Europe. That would mean higher unemployment, and inevitably political blowback. Already, Minister for Finance Michael McGrath has been unusually candid in warning of the “real life impact” of higher rates.

Given the context, Germany’s manufacturing sector may well be the canary in this particular coal mine.