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August 24, 2019
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Kuwait Times Business International

German economy teetering on edge of recession

A combination of file pictures shows facets of German industry. – AFP

BERLIN: Slumping
exports sent Germany’s economy into reverse in the second quarter, with
prospects of an early recovery slim as its manufacturers struggle at the sharp
end of a global slowdown amplified by tariff conflicts and fallout from Brexit.
Overall output fell 0.1 percent quarter-on-quarter, data showed yesterday. With
pressure growing on a thus far reluctant government to provide more fiscal
stimulus, the economy minister said action was needed to prevent a second
consecutive quarter of contraction that would tip the country into recession.

The global
slowdown has broadly impacted the Eurozone, where corresponding data showed
second quarter growth halved to 0.2 percent. But Germany’s traditionally export-reliant
economy – Europe’s largest – has been particularly vulnerable, amid signs that
the boost it has received from a sustained period of surging domestic demand is
waning. “Today’s GDP report definitely marks the end of a golden decade
for the German economy,” said ING analyst Carsten Brzeski. “Trade
conflicts, global uncertainty and the struggling automotive sector have finally
brought (it)… down on its knee.”

On a
calendar-adjusted basis, annual growth slowed to 0.4 percent from 0.9 percent in
the first quarter, the Federal Statistics Office data showed, and for 2019
overall Berlin expects growth to drop to just 0.5 percent from last year’s 1.5
percent. The economy ministry called the outlook subdued, noting that Britain’s
scheduled exit from the EU on Oct. 31 looked likely to be a disorderly one,
while Economy Minister Peter Altmaier said Wednesday’s data was a wake-up call.
“We are in a phase of economic weakness but not yet in recession. We can
avoid that if we take the right measures,” Altmaier told mass-market daily

His ministry said
impetus was unlikely to come from the industrial sector, whose BDI association
– in an unusual move -joined a growing chorus of voices urging the government
to kick-start growth by ditching its balanced budget rule and finance more
public investments through new debt.

A government
spokeswoman said Berlin did not currently see “any need for further
measures to stabilize the economy,” which was still expected to grow
slightly this year. Despite yesterday’s headline quarterly figure matching
expectations, markets also took fright, with the yield on Germany’s benchmark
10-year government bond hitting a record low of -0.624 percent. “The
bottom line is that the German economy is teetering on the edge of recession,”
Andrew Kenningham from Capital Economics said, noting that exporters were
facing an even bigger potential hit if a no-deal Brexit materialized.

Domestic safety

The statistics
office said that net trade slowed second quarter economic activity as exports
recorded a stronger quarter-on-quarter decrease than imports. Construction was
also a drag, after the sector pushed up overall growth in the first three
months due to an unusually mild winter.

In a conclusion
echoed by the economy ministry and Bundesbank President Jens Weidmann, the
office said domestic demand remained robust. That has become an important
growth driver for Germany in recent years as consumers benefit from record-high
employment, inflation-busting pay hikes and low borrowing costs.

But UniCredit
analyst Andreas Rees suggested the positive impact of those factors was

“For a year
now, the German economy has been only crawling forward,” Rees said, with
the many uncertainties facing exporters presaging more pain over the rest of
the year. ING’s Brzeski said a national debate about easing fiscal policy to
provide stimulus – a focus for international criticism of the government’s
economic management since the peak of the financial crisis – would get more

In a guest
article in yesterday’s edition of business daily Handelsblatt, BDI association
managing director Joachim Lang said the balanced budget that the government has
stuck to rigidly since 2014 “should be called into question in an
economically fragile situation”. A government official told Reuters last
week that Berlin was considering issuing new debt to finance a costly climate
protection package.

On Tuesday,
Chancellor Angela Merkel poured cold water on the calls for more fiscal
stimulus, and yesterday the government spokeswoman said this position had not
changed. “The fiscal policy of the German government is already
expansive,” the spokeswoman added. Merkel had noted the already agreed
removal of the Soli income tax surcharge for most employees from 2021, a relief
worth some 11 billion euros per year that is likely to support domestic demand
and with it overall growth. — Reuters

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