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The ECB rate hike coincides with a gloomy indicator for the German economy – The Irish Times

The ECB rate hike coincides with a gloomy indicator for the German economy – The Irish Times

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

Despite what you may think, business journalists generally try to avoid using a lot of adjectives in news stories. “Show don’t tell” is a common mantra in the industry. Still, it’s okay to describe the German factory order data for March as terrible, terrible or very, very bad.

Factory order data is considered important because it is a leading indicator of economic activity. Usually, the direction of factory orders will contribute to overall economic growth or contraction, so it is closely watched. The measure fell 10.7 percent in March, the biggest drop since the early days of the pandemic, when global trade was essentially at a standstill for a few months. The decline was more than four times what economists had expected.

Given its size, Germany plays a major role in whether the EU economy is growing overall. 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 excessive impact of Ireland’s multinational-driven GDP growth.

Economists pointed to the sharp rise in interest rates, which is likely to come, as the main reason for the decline. This perfectly highlights the problem facing the central bank. Should it continue with rate hikes to curb inflation? Or pause and see if the increases are enough so far?

It is quite possible that the increases are already being broadcast by the European economy, but are only now showing up in the data. It is of course also possible that this is not the case. The big fear, as described earlier in these pages, is that the ECB moves too fast and stifles activity across Europe. That would mean higher unemployment, and inevitable political backlash. Treasury Secretary Michael McGrath has already been unusually candid in his warning of the “real life impact” of higher rates.

Given the context, the German manufacturing sector could well be the canary in this particular coal mine.

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