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Germany economy hurt by slowdown in world trade

posted onAugust 14, 2019
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Germany's GDP contracted by 0.1% in the second quarter-decelerating from a 0.4% rise in the first quarter- a second negative result in a year, data from Destatis, the Federal Statistical Office showed Wednesday, spurring fears of a recession in the world's fourth largest economy, and Europe's biggest.

Trade conflicts and global uncertainty have dampened foreign demand for goods produced in Europe’s industrial core which relies heavily on exporters that sell a large amount of goods to China and the United States.

"The development of foreign trade slowed down economic growth because exports recorded a stronger quarter-on-quarter decrease than imports," Destatis said.  

As Washington and Beijing remain locked in a bitter trade dispute, Germany has only grown by 0.4% over the last year.China is Germany's third-biggest export market.  

Germany’s malaise affects Europe

The contraction comes as European economies are also weathering growth slowdowns. According to data published last week,  Uncertainty over Brexit fuelled a 0.2% contraction in Britain's economy last quarter — its first decline since 2012. 

British Prime Minister Boris Johnson has said his country will leave the EU on Oct. 31, with or without a negotiated settlement to smooth the path to the new trading relationship. 

Growth in France and Spain has also slowed. France's GDP decelerated to 0.2% from 0.3%. Spain's expanded 0.5%, but this was the weakest in five years. GDP in Italy which is on the brink of a recession, remained flat in the second quarter. 

Germany economy

(Graph Source: Destatis)

Economists' comments

"Today's GDP report definitely marks the end of a golden decade for the German economy," Carsten Brzeski, chief economist in Germany at the Dutch bank ING wrote in an emailed research note. 

“The bottom line is that the German economy is teetering on the edge of recession” said  Andrew Kenningham, an economist at Capital Economics.

“Besides Brexit, this is above all the U.S.-Sino trade dispute and possible U.S. tariffs on European cars,” UniCredit analyst Andreas Rees said. 

“We are getting to a point where the German government has to do something to stimulate the economy” Marija Veitmane of State Street told Bloomberg TV.

Berlin's Economy Minister Peter Altmaier told Bild that the data by Destatis  must be a "warning signal" and  a “wake-up call".

More signal of weakness from Europe's biggest economy

German industrial production registered its biggest annual decline in almost a decade in June. The Economy Ministry said last week that production was down 1.5% in June from the month before. That followed a 2% decline in April and a 0.1% gain in May. Compared with June 2018, total industrial output fell 5.2%.

Meanwhile, German investor confidence hit its lowest ebb in almost eight years in August, a survey by the Centre for European Economic Research (ZEW) showed on Aug. 13.
The Mannheim-based researchers’ monthly barometer measuring investors’ economic expectations for Europe’s economic engine dived to -44.1. This corresponds to a drop of 19.6 points compared to the previous month. It is also far below the indicator's long-term average of 21.6 points and its lowest since December 2011.

ZEW President Professor Achim Wambach commented:

“The ZEW Indicator of Economic Sentiment points to a significant deterioration in the outlook for the German economy. The most recent escalation in the trade dispute between the US and China, the risk of competitive devaluations, and the increased likelihood of a no-deal Brexit place additional pressure on the already weak economic growth. This will most likely put a further strain on the development of German exports and industrial production.” 

Markets react

European markets turned lower during the first hour of trading on the continent this morning as investors sold up stocks and headed towards safer assets  after it was revealed  that German GDP contracted. 

In Frankfurt, the benchmark stock index, the Dax, lost 0.33% at 10 am CET, with Thyssenkrupp trading as the worst performing stock, slumping 2.94% . In  London, the FTSE 100 index was off 0.05% at 10:01 am CET. France's CAC 40 index dropped 0.29% at 9:46 am CET
 
The yield on Germany’s 10-year Bund hit a record low of -0.624%.

Germany's export-driven economy is struggling under the weight of trade tensions, 
weaker foreign demand, Brexit and world economic slowdown.  But we remain optimistic that it will rebound, as it is based on strong fundamentals, history has showed. Hopefully, major player of international trade will find common ground to settle their disputes and the world economy will return to the desirable path of growth again.

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