Germany confronts growing risk of economic slowdown
Having narrowly escaped a technical recession last year, Germany is once more facing the threat of economic contraction as the prolonged weakness in its manufacturing sector shows increasing signs of seeping into services and consumer spending.
The Bundesbank, and analysts polled by Reuters, expect that when the latest quarterly gross domestic product figures are published on Wednesday, they will show that the German economy shrank 0.1 per cent in the three months to June.
That is a sharp reversal from its first-quarter 0.4 per cent expansion, and a notable under performance compared with the 0.2 per cent second-quarter growth across the eurozone as a whole.
Economists worry that a combination of turmoil in Germany’s car making industry, the escalating trade war between the US and China and the prospect of a disruptive UK exit from the EU could drag the world’s fourth-largest economy into its first recession for more than six years — defined as two consecutive quarters of negative growth.
Last week a string of economic data releases laid bare the growing weakness in Germany’s export-heavy industrial heartland, which has long been the main motor of the country’s economic growth. German exports have fallen 8 per cent in the past year, while industrial production has dropped 5.2 per cent.
“If companies expect the investment climate is going down they stop ordering components [and] reduce their stocks, so this can happen very fast,” said Ulrich Ackermann, head of foreign trade at VDMA, the trade body for machine manufacturers. “[It is] the first sign that the economy is declining. It is usually component companies that get hit first.”
Germany’s reliance on manufacturing means its economy is suffering more than those in other European countries. For instance, French car production has proved more resilient in the past year than Germany’s, which is still being rocked by the diesel emissions scandal, and France’s economy is better supported by domestic demand.
Several big German manufacturers have warned recently that the downturn is hitting their performance, including Continental, Bosch and Thyssenkrupp.
Until now, however, many people in Germany have been insulated from the slowdown. Unemployment is near record lows and the housing market is booming.
“Services, the public sector and the housing market have all had strong growth,” said Klaus Günter Deutsch, head of research, industrial and economic policy at BDI. “So it doesn’t feel like a big problem because employment is still rising.”
Yet he forecast this would not last long. There are already 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.
“The government is looking at this with concern as the economy is deteriorating faster than it had expected,” said Mr Deutsch. “I think the attention should now shift to fiscal policy.”
While 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 repeatedly insisted that eurozone governments should not rely on monetary policy alone to save the bloc from a prolonged period in the economic doldrums.
“Germany is the cyclical bellwether of Europe and until there is a co-ordinated fiscal response across the eurozone, there is a risk that a German recession could prove recessionary for the whole block,” said Lena Komileva, chief economist at G+ Economics.
If Wednesday’s GDP figures show Germany’s economy contracting, the pressure on the government to take more urgent fiscal measures is likely to increase.
For the past decade, the German government has stuck to an ultra-prudent fiscal rule that prevents it from running budget deficits. Last year the budget surplus reached €58bn, its highest since Germany’s reunification two decades ago and equal to 1.7 per cent of GDP.
Criticism of this “schwarze Null” rule is growing, especially as all of Germany’s public sector bonds are trading with negative yields, making debt issuance extremely cheap.
“There are more structural weaknesses in the German economy that need to be addressed,” said Carsten Brzeski, ING’s chief economist for Germany. “You need investment in digitisation, infrastructure and education.”
The drawback of infrastructure spending is that it may take years to have an effect. Instead, several economists argue Germany should consider cutting its corporate tax rate which at about 30 per cent is well above both the EU and OECD averages.
“Tax cuts could help — I am in favour of this,” said Jörg Krämer, chief economist at Commerzbank.
But, he added, even a fiscal stimulus package from the government in Berlin would do little to improve the external economic environment.
“We should not forget that Germany’s problems come from outside the country and if you cut taxes . . . it does not fix the underlying problem,” he said.