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German economy contracts as global trade slowdown takes a toll

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The German economy shrank in the three months to June, as trade tensions between the US and China weighed on its export-heavy manufacturing sector and sharpened 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. The new figures mean Germany’s economy grew by 0.4 per cent in the year to June, its slowest rate for six years, underlining how Europe’s largest economy has gone from being the powerhouse of the region to one of its main laggards.

The figures published on Wednesday by the Federal Statistics Office (Destatis) represent a sharp reversal from Germany’s first-quarter 0.4 per cent expansion, and a notable underperformance compared with the 0.2 per cent second-quarter growth across the eurozone as a whole.

Destatis said a slowdown in foreign trade had been partly offset by growth in domestic consumption and capital formation. It added that a contraction in foreign trade “slowed down economic growth because exports recorded a stronger quarter-on-quarter decrease than imports”.

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

A combination of turmoil in Germany’s carmaking industry, the escalating trade war between the US and China and the prospect of a chaotic UK exit from the EU are all weighing on the world’s fourth-largest economy.

On Tuesday, the Zew survey of financial market experts revealed that German economic sentiment in August had dropped to minus 44.1, its lowest since the eurozone financial crisis in 2011 and much gloomier than estimates from analysts.

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The European Central Bank is set to cut interest rates further into negative territory next month, becoming the latest central bank to loosen monetary policy. ECB President Mario Draghi has, however, repeatedly insisted that eurozone governments should not rely on monetary policy alone to save the bloc from a prolonged period in the economic doldrums.

German 10-year Bund yields held near historic lows of minus 0.621 per cent after the release of the data. The government debt has rallied strongly in recent months amid signs of an economic slowdown expectations for ECB easing.

Speaking before the release of the GDP figures, Angela Merkel said she did not see the need for stimulus package “so far”, while conceding: “It’s true, we’re heading into a difficult phase.” The German chancellor added: “We will react depending on the situation.”

Until now, however, many people in Germany have been insulated from the slowdown. Unemployment is near record lows and the housing market is booming. “Domestic demand is still somewhat propping up the economy,” said Ms Merkel.

Yet there are some signs that the downturn is spreading: 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 job growth in June over the past five years, while a succession of industrial companies cut workers’ hours in recent weeks.

Several big German manufacturers have warned recently that the downturn is hitting their performance, including Continental, Bosch and Thyssenkrupp.

Via Financial Times

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