Ger­many teeters to­ward re­ces­sion

US-China trade, Brexit tak­ing toll, cen­tral bank says

The Morning Call - - BUSINESS CYCLE - By David Ris­ing

BER­LIN — Ger­many, Europe’s in­dus­trial pow­er­house and big­gest econ­omy, with com­pa­nies like Volk­swa­gen, Siemens and BASF, may be en­ter­ing a re­ces­sion, ac­cord­ing to a gloomy re­port from the coun­try’s cen­tral bank this week — a de­vel­op­ment that could have reper­cus­sions for the rest of the eu­ro­zone and the United States.

A tech­ni­cal re­ces­sion is de­fined as two con­sec­u­tive quar­ters of neg­a­tive growth, and Ger­many saw a 0.1% drop in the April-to-June pe­riod. In its monthly re­port, the Bun­des­bank said that with fall­ing in­dus­trial pro­duc­tion and or­ders, it ap­pears the slump is con­tin­u­ing dur­ing the July-toSeptem­ber quar­ter.

“The over­all eco­nomic per­for­mance could de­cline slightly once again,” it said. “Cen­tral to this is the on­go­ing down­turn in in­dus­try.”

Deutsche Bank went fur­ther Mon­day, say­ing “we see Ger­many in a tech­ni­cal re­ces­sion” and pre­dict­ing a 0.25% drop in eco­nomic out­put this quar­ter.

Ger­many’s econ­omy is heav­ily de­pen­dent on ex­ports, and the Bun­des­bank said the trade con­flict be­tween the U.S. and China and un­cer­tainty about Bri­tain’s move to leave the Euro­pean Union have been tak­ing their toll. The U.S. and China are among Ger­many’s top trade part­ners, with Bri­tain not far be­hind.

In ad­di­tion, Ger­many’s auto in­dus­try — with giants like Volk­swa­gen, Daim­ler and BMW — faces chal­lenges ad­just­ing to tougher emis­sions stan­dards in Europe and China and to tech­no­log­i­cal change as de­mand grows for elec­tric ve­hi­cles. Ger­many is also home to such ma­jor cor­po­ra­tions as Bayer, Merck, Linde and the ThyssenKru­pp Group.

The Bun­des­bank re­port is in line with a con­sen­sus among economists that “the risk of an­other quar­ter flirt­ing with re­ces­sion is high,” Carsten Brzeski, the chief econ­o­mist for ING bank in Ger­many, told The As­so­ci­ated Press.

“The big­ger pic­ture is that the trade con­flicts and un­cer­tainty are fi­nally start­ing to hurt one of the most open economies,” he said.

Though the la­bor mar­ket in Ger­many re­mains strong, with un­em­ploy­ment around his­toric lows, if eco­nomic con­cerns prompt con­sumers to stop buy­ing — or at least to put off pur­chases — that could start to drag down growth in coun­tries that count on Ger­many as a mar­ket for their ex­ports.

“If this stag­na­tion/re­ces­sion con­tin­ues and leaves more last­ing marks on the do­mes­tic econ­omy, the rest of the world will also no­tice,” Brzeski said. “Just think of weaker Ger­man de­mand for for­eign goods or a Ger­man slow­down drag­ging the rest of the eu­ro­zone down — it could be a bit of a boomerang ef­fect for the U.S., show­ing that no one re­ally wins trade wars.”

In the United States, a sur­vey of business economists re­leased Mon­day found that 74% ap­pear suf­fi­ciently con­cerned about the risks of some of Pres­i­dent Donald Trump’s eco­nomic poli­cies that they ex­pect a re­ces­sion in the U.S. by the end of 2021.

Amid the trade con­flict be­tween Wash­ing­ton and Bei­jing, the in­creas­ing prospect of Bri­tain leav­ing the EU with­out an exit agree­ment, and grow­ing fears that coun­tries may race to de­value their cur­ren­cies, the monthly ZEW poll of Ger­man in­vestors fell to its low­est level last week in over 7 1⁄2 years.

“The ZEW in­di­ca­tor of eco­nomic sen­ti­ment points to a sig­nif­i­cant de­te­ri­o­ra­tion in the out­look for the Ger­man econ­omy,” said Achim Wam­bach, pres­i­dent of the Mannheim­based in­sti­tute.

Ger­many is still ex­pected to post mod­est growth this year, with the Bun­des­bank pre­dict­ing 0.6% and the gov­ern­ment 0.5% growth, but its slow­down is al­ready start­ing to have an ef­fect on the wider 19-na­tion eu­ro­zone, which last week an­nounced that growth had halved in the sec­ond quar­ter to just 0.2%.

In re­sponse to the slug­gish economies, the Euro­pean Cen­tral Bank has sig­naled it is pre­par­ing a pack­age of ad­di­tional mon­e­tary stim­u­lus mea­sures, in­clud­ing a pos­si­ble rate cut and bond pur­chases, which could be an­nounced at its Sept. 12 meet­ing.

Ger­many un­der Chan­cel­lor An­gela Merkel has been run­ning bud­get sur­pluses for years but has come un­der pres­sure from the In­ter­na­tional Mon­e­tary Fund, the U.S. Trea­sury Depart­ment and others to un­der­take mea­sures to boost do­mes­tic de­mand, such as cut­ting taxes and spend­ing more on in­fra­struc­ture.

Dur­ing the re­ces­sion a decade ago, Merkel’s gov­ern­ment was widely crit­i­cized for drag­ging its feet in pass­ing a stim­u­lus pack­age, though it even­tu­ally in­tro­duced mea­sures adding up to some 80 bil­lion eu­ros, the largest such pack­age in the coun­try’s post­war his­tory.

Last week, Merkel sug­gested she was open to the pos­si­bil­ity of stim­u­lus mea­sures, say­ing that there was no need for a pack­age “so far” but that “we will re­act ac­cord­ing to the sit­u­a­tion.”

She noted that her gov­ern­ment is al­ready work­ing on plans to re­move in most cases an in­come tax aimed at cover­ing costs as­so­ci­ated with re­build­ing the for­mer East Ger­many.


The build­ings in the bank­ing dis­trict stand out as the sun sets over the city of Frank­furt in Ger­many, Europe’s in­dus­trial pow­er­house and big­gest econ­omy. Ger­many may be en­ter­ing a re­ces­sion, ac­cord­ing to a re­port from the coun­try’s cen­tral bank.

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