German economy contracts as export engine stutters

The German economy shrank in the three months to June as trade tensions weighed on its export-heavy manufacturing sector and intensified the pressure on politicians in Berlin to loosen the fiscal purse strings.

Germany’s output fell 0.1 per cent in the second quarter from the previous three months, meaning annualised output growth slowed to 0.4 per cent in the year to June - its slowest for six years.

The figures underline how Europe’s largest economy has gone from being the powerhouse of the region to one of its laggards, weighed down by a combination of turmoil in Germany’s carmaking industry, the escalating US-China trade war and the prospect of a chaotic UK exit from the EU.

Historic GDP figures for the second half of last year were revised upwards, indicating that Germany did not come as close to recession as previously thought. But the second-quarter data represent a sharp reversal from Germany's 0.4 per cent expansion in the first three months of this year, and a notable underperformance compared with the 0.2 per cent second-quarter growth across the euro-zone as a whole.

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A slowdown in foreign trade and a drop in construction investment were partly offset by growth in household and government spending, according to Germany’s federal statistics office.

‘Warning signal’

Peter Altmaier, German economy minister, described the data as a “wake-up call and warning signal” but insisted that Germany could avoid a recession.

“There is no sign of a severe downturn. What we need now are not flash-in-the-pan measures but intelligent growth policies that secure jobs,” he told Bild newspaper. “These include tax breaks for companies, especially the Mittelstand...And we need investments in the digital economy and in technologies of the future, so that our economy remains competitive internationally.”

Speaking before the release of the gross domestic product figures, Angela Merkel, chancellor, said she did not see the need for a stimulus package “so far”, while conceding that “it’s true, we’re heading into a difficult phase”.

She added: “We will react depending on the situation.”

Many economists fear that Germany, which narrowly escaped a technical recession last year, faces the threat of a prolonged contraction as weakness in its manufacturing sector seeps into its previously buoyant services and consumer spending.

Figures for growth in the services sector were revised downward last week and the job market is slowing: only 1,000 jobs were created in June, well below the 44,000 average for June over the past five years. Several industrial companies have cut workers’ hours in recent weeks.

Gloomier

Recent data suggest the economic weakness is continuing into the second half of this year. Earlier this week the Zew survey of financial market experts revealed that economic sentiment dropped to minus 44.1 in August, its lowest since the euro-zone financial crisis in 2011 and much gloomier than analysts had expected.

Nadia Gharbi, an economist at Pictet Wealth Management, said: “The risk of recession is now elevated. While domestic demand has remained resilient so far, industrial slump has started to leave some marks on domestic demand.”

Volkswagen added to the gloomy picture on Wednesday by announcing that its car deliveries had fallen 3.3 per cent year on year in July.

The composite Stoxx Europe 600 index fell 0.4 per cent in morning trading on Wednesday, with Germany's Dax index of blue-chip companies dropping 0.7 per cent. German 10-year Bund yields dipped to near historic lows of minus 0.624 per cent. Government debt has rallied strongly in recent months amid signs of an economic slowdown and expectations for European Central Bank easing.

Negative territory

The ECB is set to cut interest rates further into negative territory next month but its president Mario Draghi has repeatedly insisted that euro-zone governments should not rely on monetary policy alone to save the bloc’s economy.

There is growing evidence that Germany’s weakness is spreading across the euro-zone more widely. Industrial production across the bloc fell 1.6 per cent in July, dragged down by a 4.8 per cent drop in capital goods production. That equated to a 2.6 per cent from July 2018, with the biggest falls being felt in Germany, Croatia and Portugal.

Carsten Brzeski, chief economist for Germany at ING, said that since the third quarter of 2018 Germany had stagnated, with quarterly GDP growing at an average of zero per cent.

“Today’s GDP report definitely marks the end of a golden decade for the German economy,” he said. “The pressure on the German government to act will increase.” – Copyright The Financial Times Limited 2019