
“The bottom line is that the German economy is teetering on the edge of recession,” said Andrew Kenningham, chief Europe economist at Capital Economics.
While growth has been dragged lower in each country by a specific cocktail of factors, a global manufacturing slump and a sharp drop in business confidence have made matters worse.
“The common feature is the weak global backdrop,” said Neil Shearing, group chief economist at Capital Economics.
Economies at risk
Germany relies heavily on exporters that sell a disproportionate amount of goods to China and the United States. Lackluster global auto sales have also hit its carmakers.
“Today’s GDP report definitely marks the end of a golden decade for the German economy,” said Carsten Brzeski, chief economist in Germany at the Dutch bank ING.
Investment has dropped in Mexico and the country’s services sector is under pressure. Brazil, the largest economy in Latin America, is suffering from weak industrial production and high unemployment. Data due in the coming weeks will confirm whether it has fallen into recession.
Storm clouds
Shearing argues that some of the gloom and doom is unjustified. At a global level, he says, spending by companies on assets such as equipment have stabilized. The labor market is resilient.
“While there are pockets of extreme weakness in the world economy — particularly in manufacturing — other parts are holding up relatively well,” he said. “All of this is consistent with our view that global growth is slowing rather than collapsing.
Yet he also points to three big risks.
The first is the trade war. If Beijing and Washington continue to ratchet tensions higher, business confidence could plummet. The International Monetary Fund has warned that growth in 2020 would be slashed by half a percentage point if the dispute escalates further.
Other central banks from India to Thailand have slashed rates, and more cuts are expected.
The final risk is that the global services sector, which has supported growth, begins to mirror the downturn seen in manufacturing.
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