Shrinking German economy 'on edge of recession' as exports stutter

BERLIN (Reuters) - A slump in exports sent Germany's economy into reverse in the second quarter, data showed, as its manufacturers bore the brunt of a global slowdown amplified by tariff conflicts and uncertainty over Brexit.

Gross domestic product (GDP) fell 0.1% quarter-on-quarter, in line with a Reuters poll of analysts, as several observers raised prospects of another contraction in the third quarter, and the industrial sector suggested the government should ditch its balanced budget and kick-start growth via fiscal stimulus.

On a calendar-adjusted basis, the annual growth rate in Europe's largest economy slowed to 0.4% in the second quarter from 0.9% in the first, Wednesday's Federal Statistics Office data showed. For 2019 overall, Berlin expects growth of just 0.5%.

"The bottom line is that the German economy is teetering on the edge of recession," Andrew Kenningham from Capital Economics said, noting that exporters were facing an even bigger potential hit if a threatened no-deal exit from the EU by Britain actually materialized on Oct. 31.

Many economists define a recession as two consecutive quarterly contractions.

Despite Wednesday's headline quarterly figure matching expectations, markets also took fright, with the yield on Germany's benchmark 10-year government bond hitting a record low of -0.624% <DE10YT=RJR>.

The global slowdown has impacted growth across western Europe, but Germany's traditionally export-reliant economy has been particularly vulnerable.

The statistics office said that net trade slowed economic activity as exports recorded a stronger quarter-on-quarter decrease than imports.

Construction was also a drag, after the sector pushed up overall growth in the first three months due to an unusually mild winter.

"Today's GDP report definitely marks the end of a golden decade for the German economy," Cars ten Brzeski from ING said.

"It was a decade of strong growth on the back of earlier structural reforms, fiscal stimulus, localization at its peak and steroids provided by the ECB in the form of low-interest rates and a relatively weak euro."

DOMESTIC SAFETY NET?

Domestic demand has become an important growth driver for Germany in recent years as consumers benefit from record-high employment, inflation-busting pay hikes and low borrowing costs.

Positive contributions came from that source in the second quarter, as household consumption, government expenditure and gross fixed capital formation increased on the quarter, the statistics office said.

But analysts suggested the positive impact of those factors was waning.

"For a year now, the German economy has been only crawling forward," UniCredit analyst Andreas Rees said, with the many uncertainties facing German exporters presaging more pain in the rest of the year.

"Besides Brexit, this is above all the U.S.-Sino trade dispute and possible U.S. tariffs on European cars," Rees said.

ING's Brzeski said that, with trade conflicts, global uncertainty and the struggling automotive sector having "finally brought the German economy to its knees," a national debate about fiscal stimulus would get more heated.

In an usual move, the powerful BDI industry association joined the growing chorus of voices demanding that the German government ditch its balanced budget rule.

"In contrast to the debt brake, which is enshrined in the constitution, the black zero (balanced budget) should be called into question in an economically fragile situation," its managing director Joachim Lang wrote in a guest article in Wednesday's edition of business daily Handelsblatt.

His comments came after a government official told Reuters last week that Berlin was considering issuing new debt to finance a costly climate protection package.

Chancellor Angela Merkel had on Tuesday poured cold water on domestic and international calls for more fiscal stimulus, saying there was no need "right now" for such a move.

Merkel also pointed to already agreed fiscal steps such as the abolishment of the Soli income tax surcharge for most employees from 2021, a relief worth some 11 billion euros per year that is likely to support domestic demand and with it overall growth.

(Reporting by Michael Nienaber; editing by Thomas Seythal and John Stonestreet)

08/14/2019 9:21

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