Economist: German government needs to act
The slump in German growth could force Angela Merkel to ditch her long-running opposition to government borrowing.
Germany’s ‘debt brake’ law forces its leaders to run balanced budgets, rather than running up deficits. But with an economy struggling, and borrowing costs extremely low, there’s a strong argument for tapping the bond market to fund more investment.
As Marija Veitmane of State Street put it on Bloomberg TV this morning:
We are getting to a point where the German government has to do something to stimulate the economy.
Yesterday, Merkel hinted that she could loosen the purse strings, telling a town hall meeting that her government would take action if needed.
The chancellor said:
“It’s true, we’re heading into a difficult phase….We will react depending on the situation.”
Unicredit analyst Andreas Rees reckons Germany’s economy has been hurt by the uncertainty over Britain’s exit from the European Union.
For a year now, the German economy has been only crawling forward.
Besides Brexit, this is above all the U.S.-Sino trade dispute and possible U.S. tariffs on European cars.
ING: End of a golden decade for Germany
Today’s GDP report marks “the end of a golden decade for the German economy”, says Carsten Brzeski, chief economist for Germany at Dutch bank ING.
Brzeski sounds deeply disappointed to learn that the German economy contracted by 0.1% in the last quarter.
He blames the damaging uncertainty caused by Donald Trump’s trade war with China, along with problems at Germany’s carmakers, writing:
Trade conflicts, global uncertainty and the struggling automotive sector have finally brought the German economy down on its knee.
In particular, increased uncertainty, rather than direct effects from the trade conflicts, have dented sentiment and hence economic activity.
Brzeski points out that Germany had been on a decent run since the financial crisis, growing at around 0.5% per quarter. Not any more….
It was a decade of strong growth on the back of earlier structural reforms, fiscal stimulus, globalisation at its peak and steroids provided by the ECB in the form of low-interest rates and a relatively weak euro.
This decade, in which strong German growth looked so effortless, is coming to an end.
Here’s Nadia Gharbi of Pictet Asset Management:
Germany is clearly struggling, but it’s not alone.
Last week, we learned that Britain’s economy contracted by 0.2% in the second quarter of this year, as the boost from Brexit stockpiling earlier in the year faded.
But the UK is still doing better on a longer-term basis — UK GDP grew by 1.2% over the last year, compared to just 0.4% annual growth for Germany.
Growth across the eurozone halved last quarter, from 0.4% to 0.2%, with France growing by 0.2% and Italy stagnating (again). That data will be updated at 10am UK time….
Several economists are warning that Germany’s economy could still be shrinking – plunging it into a full-blown recession.
Katharina Utermöhl, senior economist for Europe at insurance giant Allianz SE, points out that Germany has looked very weak this summer:
Economics professor Sebastian Dullien agrees that recession risks are rising:
Martin Grieve of German newspaper Handelsblatt points out that recent German manufacturing data has been very weak (industrial production slumped in June).
Germany isn’t technically in recession yet — that would mean two successive quarters of negative growth.
But still…. its economy has really struggled over the last year, and has contracted in two of the last four quarters.
Today’s growth reports shows that:
- Q3 2018: German GDP contracted by 0.1%
- Q4 2018: German GDP grew by 0.2% (revised higher this morning)
- Q1 2019: German GDP grew by 0.4%
- Q2 2019: German GDP shrank by 0.1%
That adds up to annual growth of just 0.4% – well below the 2.2% recorded in 2017, or the 1.5% in 2018.
Germany economy hit by trade wars
Germany’s exporting powerhouse stumbled in the April-June quarter.
German exports fell during Q2, Destatis says, which is why the economy shrank by 0.1%.
However, consumer and government spending helped to prop the economy up.
Household final consumption expenditure increased, together with government final consumption expenditure.
In addition, more was invested than in the first quarter, however, gross fixed capital formation in construction declined. The development of foreign trade slowed down economic growth because exports recorded a stronger quarter-on-quarter decrease than imports.
Introduction: Germany’s economy shrinks
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Newsflash: Germany’s economy has shrunk, fuelling worries that the eurozone could be teetering close to recession.
Europe’s largest economy shrank by 0.1% in the second quarter of 2019, new data shows, following 0.4% growth in the first three months of the year.
Destatis, the Federal Statistical Office, reports that Germany experienced “a slight decline in economic performance” in the last quarter, as it was dragged down by a fall in exports.
Destatis also reports that Germany’s economy only grew by 0.4% over the last 12 months, which looks to be the weakest performance in several years.
This data confirms that Germany has suffered a blow from the slowdown in the global economy, and the US-China trade war which hurt demand for German-made goods.
More to follow…..
Also coming up today
New UK inflation data is expected to show a slight slowdown last month, with prices rising less sharply than earnings in July. That would be a relief for households, although the recent slump in sterling could push inflation higher this summer.
Global investors are feeling slightly more optimistic, after Donald Trump delayed planned tariffs on Chinese-made goods such as cell phones, laptops and video game consoles. That will avoid pre-Christmas price hikes – and could also soften tensions with Beijing.
- 9.30am BST: UK inflation data (CPI expected to drop to 1.9%, from 2%)
- 10am BST: Eurozone Q2 GDP (expected to confirm that growth slowed to 0.2%, from 0.4%).