The economic outlook in Germany is deteriorating with alarming speed and any mistake by policymakers may push the county into a full-blown slump, a leading economic institute has warned.
"The danger of recession has increased markedly. It is a notably more critical picture than a month ago," said the Macroeconomic Policy Institute (IMK) in Dusseldorf.
The IMK's early warning indicator said the recession risk over the next three months has jumped to 32.4 per cent as trade tensions mount and liquidity ebbs away in the financial system.
This is higher than in March 2008 when the pre-Lehman storm clouds were gathering and the country was already sliding into a slump, unbeknown to Berlin at the time. It may be a false alarm, but it clearly indicates that global growth is weaker than widely assumed just weeks ago.
"What we have seen lately is a typical late-cycle constellation, with uncertainty from the financial markets having a self-reinforcing spillover into the real economy. It is not yet clear whether such a downward spiral has already begun. Everything must be done to avoid intensifying the uncertainty," it said.
Germany is heavily reliant on world trade and is therefore a bellwether for the broader health of the global economy. Its industrial sector lurched abruptly from boom to bust early in the last downturn and proved to be a leading indicator for the Great Recession.
JP Morgan's instant "Nowcast" tracker of eurozone growth in the first quarter has dropped to 1.5 per cent, half the torrid pace of late 2017.
Germany is the chief supplier of machine tools and engineering equipment to China. The weakening data dovetails with signs that the Chinese economy has come off the boil since the Communist Party conclave last November.
The delayed effect of credit curbs is biting. Beijing is trying to get a grip on its fiscal deficit, now 12 per cent of GDP. Proxy measures put together by Capital Economics suggest that the true rate of economic growth in China has dropped to near 4.5 per cent, a "growth recession" in Chinese terms and a far cry from the "smoothed" official figure of 6.6 per cent.
The IMK said a confluence of US-China trade jitters, a decline in German industrial output and a 7 per cent fall in the DAX index of equities since mid-January — led by bank stocks — were all feeding off each other.
The recession indicator was briefly higher in the Chinese currency crisis in early 2016. That storm passed for two key reasons: the US Federal Reserve backed away from monetary tightening, which eased pressure on the yuan and rescued China; and oil prices were then crashing due to a surge in supply, generating a US$2 trillion ($2.7t) windfall stimulus for global consumers.
The picture is very different today. The Fed is on the warpath. Joint production cuts by Opec and Russia have cleared the global oil glut. Brent crude prices are back to US$72 a barrel.
Crucially, the global money supply is slowing as quantitative easing goes into reverse, and as the Fed lifts global borrowing costs. Three-month Libor rates have jumped 60 basis points this year, hitting US$9t of floating contracts worldwide.
Simon Ward, from Janus Henderson, said the global economic slowdown was baked into the pie months ago when the money supply began to falter. His key indicator — six-month real M1 money — touched a nine-year low of 1 per cent in February.
Early data suggest a slight pick-up in March. This signal tends to lead the economy by around six months, suggesting that the global economy may remain trapped in the doldrums through the second and third quarters.
The monetary figures for the eurozone buckled last year. What is most striking is that the growth rate of real M1 deposits in France has dropped to 2.4 per cent from 7.3 per cent in September, and in Spain to 2.7 per cent from 6 per cent. Such falls do not in themselves imply a recession but they warrant caution.
The European Central Bank faces a treacherous task as it prepares to phase out QE altogether this year. The risk is that the ECB could tighten too hard and cause the soft patch to metastasise into a full-blown downturn. Monetarists argue that the US liquidity squeeze is already having powerful effects. The Fed has pencilled in four rate rises this year. It is shrinking its balance sheet by US$30b a month. The pace of quantitative tightening (QT) will rise to US$50b a month in the fourth quarter.
The picture is fluid. Opinions differ widely, with most analysts still predicting healthy global growth this year. Some expect a blow-off boom as the stimulus from Donald Trump's tax cuts feed through into fresh spending. What is clear is that the voices of dissent are growing louder and more numerous.