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Recession beckons for Germany as economy contracts

Jill Petzinger
Jill Petzinger, Germany Correspondent, Yahoo Finance UK
An employee works in front of the blast furnace past rolls of sheet steel at a mill of German steel producer Salzgitter AG on March 1, 2018 in Salzgitter, Germany. Photo: Alexander Koerner/Getty Images

Germany’s gross domestic product (GDP) contracted by 0.1% in the second quarter, according to data released Wednesday by the Federal Office of Statistics.

The contraction, in line with analyst predictions, indicated that the US-China trade conflict and a weakening global economy have started to take their toll on the export-reliant country, with trade and the construction sector a particular drag on growth. On the year, the economy still grew by 0.4%, calendar and seasonally adjusted.

“Today’s GDP report definitely marks the end of a golden decade for the German economy,” said ING Germany’s chief economist Carsten Brzeski in a note.

“Since the end of the 2008/09 recession, the economy has grown by an average of 0.5% QoQ every quarter. However, under the surface of these impressive headline numbers, a worrisome trend has emerged—since 3Q 2018, the economy has been in a de facto stagnation, with quarterly GDP growth at an average of zero percent.”

A woman pushes a pram as she walks past a pre-World War II house that stands next to new apartment buildings in a former industrial area on April 4, 2018 in Berlin, Germany. Photo: Sean Gallup/Getty Images

The gloomy data has sparked talk of fiscal stimulus from Berlin, but German chancellor Angela Merkel said on Tuesday that she did not see any need for a stimulus package. She said that “there is a need for a continued level of investments,” and that government would keep ploughing money into public investment.

Merkel added that skilled labour shortages and long planning processes are causing bottlenecks in public projects.

“Last summer the entire economy was close to overheating; now the lack of demand has become a pressing issue,” Brzeski said. “It was a decade of strong growth on the back of earlier structural reforms, fiscal stimulus, globalisation at its peak and steroids provided by the ECB in the form of low-interest rates and a relatively weak euro.”

Indications suggest that Germany won’t fare much better in the third quarter either — and two quarters of contraction would officially tip the country into a recession.

“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, economist at investment bank KfW in a note to clients.

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