Storm warning: the world economy’s October troubles aren’t over yet

October is always a turbulent month, and I’m feeling uneasy about this one. The FTSE100 index, which looked set to break through 7,000 in September, has lost more than 500 points since then — and would have lost more but for manoeuvres in the mining sector. Pessimism stalks the bond markets, and even a falling oil price is read more as a harbinger of faltering growth than a stimulus for further recovery. Ebola is the new volcanic ash cloud, and attention is focused on the apparently incorrigible weakness of the eurozone — where the biggest problem is what was long seen as the most potent solution, namely the German economy.

Fiscal discipline, strict wage control and relentless pursuit of export success made Germany the locomotive of Europe for the single-currency era; but a 0.2 per cent GDP contraction in the second quarter combined with a plunge in exports over the summer indicate that the ‘dysfunctional’ Germans (to quote economist Philippe Legrain) may be about to join the irresponsible Italians in recession, with the fiscally undisciplined French close behind — bringing consequences for our own path back to prosperity, partly dependent as it is on continental trade. The locomotive has conked out in a siding, and its engineers, set in their rigid German ways, are unwilling to launch domestic stimulus and reforms that might boost consumer spending and business investment while compensating for weak export demand.

What’s more, a historic fear of inflation even at a time when deflation is the more imminent threat means the Germans won’t green-light Mario Draghi of the European Central Bank to embark on the kind of quantitative easing that has underpinned liquidity and asset prices here and in the US — even if market pessimists believe it has also stored up trouble. As for what happens next, the results of the great Europe-wide bank stress-testing exercise are due next weekend: watch particularly for black marks against weak German regional banks.