German Q2 contraction fires calls to boost public spending

FRANKFURT AM MAIN Germany’s economy contracted in the second quarter, figures showed Wednesday, highlighting its vulnerability to trade tensions and stoking debate on higher government spending.

As the US-China trade conflict intensifies, some economists have urged Berlin to fork out cash to avoid a recession.

However, Chancellor Angela Merkel and her ministers have said things were not yet bad enough to warrant loosening the purse strings.

Shrinkage of 0.1 percent meant the economy lost significant momentum compared with the 0.4 percent growth seen in January-March.

In a year-on-year comparison, it was just 0.4 percent larger than at the end of June 2018, with flat or negative growth in three of the past four quarters.

While overall activity was supported by rising household and government spending, falling exports weighed on manufacturers, statistics authority Destatis said.

“The smouldering trade conflict is taking its toll -- and exportfocused German industry is feeling it especially keenly,” economy minister Peter Altmaier told top-selling daily Bild.

Nevertheless, “there is no sign of a significant downturn,” the close Merkel ally added.

“I don’t see any need for a stimulus package at the moment” even though the economy is in a “difficult phase”, Merkel told constituents at a meeting in Baltic coast town Stralsund Tuesday.

One data point that shores up politicians’ confidence is unemployment, close to historic lows at 5.0 percent and prompting wage rises and higher consumption.

Growth fell back to 1.4 percent last year after a surge to 2.2 percent in 2017.

For 2019, Berlin and international organisations like the International Monetary Fund predict expansion between 0.5 and 1.0 percent.

In the near term, downward trends in confidence indicators and hard data have prompted many economists to foresee further shrinkage in JulySeptember, making for a technical recession -- two successive quarters of negative growth.

“With the escalating trade conflicts of the USA, the ever more probable chaos (of ) Brexit and the weaker world economy, the perfect storm has been brewing since the summer of last year,” said Klaus Borger, an economist at public investment bank KfW.

“The door at least to a technical recession... is wide open,” Borger added.

Weak growth for Germany places it alongside Britain, down 0.2 percent in the quarter, in a group of trailing European nations.

In the eurozone, Berlin has fallen from being the model pupil to lagging Italy’s standstill economy and France which posted 0.2 percent growth.

As well as trade conflicts, its pride-and-joy car industry is struggling with consumer and government pressure to reduce emissions of gases that harm health or the climate, making massive bets on new battery- and hybrid-powered vehicles.