Don't Blame China for Germany's Data Shocker

(Bloomberg Opinion) -- China has become the fail-safe excuse for every bad economic indicator in the world. Among industries, autos are playing a similar role.

So it should be little surprise that both have been fingered as fall guys for a slump in Germany manufacturing activity that spurred gloom over global growth and doom in financial markets (including an inverted U.S. yield curve).  The purchasing managers' index fell to the lowest in six-and-a-half years. Economists at Goldman Sachs Group Inc. said it was the biggest reaction to German data that they could recall. 

How much can really be blamed on China, though? Sure, the country is big: China's auto market accounted for more than a third of global passenger vehicle sales last year and 70 percent of the industry's growth. Car sales fell 6 percent last year, the first decline in decades. So the potential for spillovers is large, no doubt.

Moreover, the German car industry has tentacles in almost every sector, so a hit to autos has knock-on effects across the manufacturing supply chain in the euro zone  and beyond. The nation's six largest auto-related firms explain around 15 percent of fluctuations in German GDP while accounting for only 10 percent of gross value added, or output, according to a Goldman analysis.

But for German carmakers, China has actually been a bright spot. Compared with brands from most other countries, which have seen sales growth slow by more than 10 percent, those from Germany have done relatively better. Registrations of German cars rose more than 8 percent in the first two months of the year, led by a jump of almost 17 percent for BMW AG. The carmaker's China sales grew 7.7 percent in 2018, a source of relief amid otherwise dismal results. The company last year became the first foreign automaker to take control of its joint venture in China. Other German carmakers are looking to do the same.

What's dangerous is the evergreen hope that China's 20-million-a-year-plus auto market will help paper over every other pain point for carmakers. There's no certainty of that. German luxury is bucking a trend of declining passenger vehicle sales (in the first two weeks of March, BMW Brilliance Automotive Ltd. and Beijing Benz Automotive Co. posted gains of 50 percent to 60 percent in average daily unit sales). Government policy looms large, with perennial questions around how adjustments to electric-car subsidies and stimulus measures to drive rural demand will play out. No one really knows what direction the market will eventually take.

Then what's going on in Germany? Carmakers in Europe have had their own share of setbacks that aren't caused by underlying demand. A new emission-testing regime that started being applied to all new car registrations this year has caused the region's car production to drop 15 percent or more as manufacturers struggled to deal with inventory based on the old standards and get new models out. The race to move into electric cars and a painful shift away from diesel haven't made decisions any easier, with billions being spent and no significant returns to inspire investor confidence yet.

On the demand side, Germany in fact is looking more positive than the numbers suggest: Car registrations are up and a survey of European consumers' intentions to buy within the next year is also showing improvement. An overall index of future expectations of growth has started coming off its lows, but pessimism over the auto and steel industries remains deep.

The perpetual threat of trade-related drama (whether related to Brexit, the U.S.-China talks, or prospective tariffs on European Union car imports) has injected significant uncertainty, too. Caution is clearly warranted. Governments may be dragged into more active industrial policies, forcing automakers to retool.

China isn't responsible for this latest growth scare. But it won't be the world's savior, either.

About 30 percent of German exports end up in central Europe.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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