Germany’s gross domestic product shrank 0.1% in the second quarter of the year, confirming the lackluster performance of the German economy hit by rising trade fears, the slowdown of Chinese imports and home-grown industrial and economic problems. Market Watch reports in its article What Germany’s dismal GDP number really means for Europe and interest rates that the GDP decline, expected as it was by most economists, puts Germany at risk of a technical recession this year (defined by two consecutive quarters of declining GDP) and contrasts with the overall eurozone’s 0.2% GDP growth in the three months to June.
Here are four takeaways from the disappointing GDP number.
1 — Germany not just a collateral victim
The export-oriented German economy is suffering from the U.S.-China dispute which has hit its trade with the rest of the world — the hit to GDP came from declining industrial and automobile exports. On the bright side, consumers kept spending and the services sector avoided contraction. Hopes that Europe and Germany might benefit from the Chinese response to U.S. President Donald Trump’s trade tariffs — if Beijing had substituted European imports for American ones — have so far proved elusive. New orders in the German industry have been falling at the fastest pace in a decade. For now, as the European economy most exposed to China, Germany is hit by the general slowdown of world trade. But the woes of its automobile industry also stem from its reluctance to tackle head-on the problem of new emission standards, and its lack of significant investment in the past in new electric or hybrid cars, which it is only now trying to catch up.
2 — A drag on the eurozone
The health of Europe’s largest economy is of crucial importance to the rest of its partners, and German’s slump has already had an impact on its neighbors — industrial production in France took an unexpected dive in June, for example. Moreover, the new complex industrial value chains incorporate many European-made components in the goods Germany exports to the rest of the world, meaning that the country’s economic slowdown will in turn hit growth in the rest of Europe, even though growth in the third quarter growth remains slightly positive, as analysts expect. Meanwhile economic sentiment in Germany is at its lowest since the beginning of the financial crisis ten years ago, as Europe prepares for the unavoidable economic shock of the no-deal Brexit the current U.K. government is preparing for.
3 — Pressure on Berlin
The German government sees the economy growing a paltry 0.5% this year, but it has steadfastly refused to loosen its fiscal policy, still aimed at balancing the budget year after year and shrinking the public debt load, which is currently under the EU-imposed limit of 60% of GDP. Ironically the economy has shown this year what a fiscal boost could bring, since it has benefited from tax cuts initiated by the government last year. Consumers are spending reasonably well, helped by an economy running at full employment and significant wage hikes in the private sector. However German finance minister Olaf Scholz has ruled out further fiscal stimulus in next year’s budget, even as the country’s infrastructure has long suffered from the low level of public investment in the last decade. But expect the debate on fiscal restraint to take a new intensity in the next months.
4 — Take it over, Mario
The dismal German GDP figure reinforces the case for another round of monetary easing by the European Central Bank next month, which could be announced at what will be the last policy meeting of outgoing President Mario Draghi. German officials and public opinion have long criticized the ECB’s policy, arguing that negative interest rates in place since 2014 are hurting a nation of savers. Draghi has responded that Germans have also benefited from the eurozone economic recovery made possible by his policy. The irony now is that the ECB will find in the German economic situation another argument to further loosen its monetary policy — either with another asset-buying programme, or by lowering interest rates further.
