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Long Story Short: Is Germany on its Way to a Recession?
Can Germany Survive the Trade War?
Germany’s economy has suffered due to declines in exports in the industry and automobile sectors. German manufacturers are presented with increasing struggles as the U.S.-China trade war over tariffs has led to a global economic slowdown and Britain’s exit from the EU leads to greater turmoil. Germany’s GDP declined by 0.1% overall, and the government is pressured with providing greater fiscal stimulus. The economy ministry stated that fiscal action is necessary to prevent Germany from falling into a technical recession. Germany, Europe’s biggest economy, is a necessary component to the economic growth and standing of its neighbors. Consumer demand and spending has been strong, helping to supplement the economy but is beginning to wane.
Need for Growth: Germany requires a growth spurt through other sectors than industrials, financing investment, and amending balanced budgeting rules. On Wednesday, Peter Altmaier, Economy Minister stated “we are in a phase of economic weakness but not yet in recession. We can avoid that if we take the right measures.” National debate has begun over the government’s economic management of fiscal policy easing to provide stimulus. Joachim Lang, BDI association managing director, stated the government’s balanced budget “should be called into question in an economically fragile situation.” Since the German economy is still expected to see some minor economic growth a Berlin government spokeswoman stated there are no needed “further measures to stabilize the economy.”
Consumer Demand: Both the service sectors and consumer spending have remained strong in the face of greater economic turmoil. Jens Weidmann, Bundesbank President, and the economy ministry stated that domestic demand is still robust. Consumer demand remains an increasingly important growth factor in the Germany economy as record-high employment, lower borrowing costs and wage increases have led to greater consumer benefits. The removal of the Soli income tax surcharge in 2021, will provide greater economic relief at around 11 billion euros per year, helping spur growth and supplementing domestic consumer demand.
Trade War: Germany’s export-oriented economy has seen negative impacts of the U.S-China trade war. The currently escalating trade war impacted the global economy seeing declines in overall eurozone growth. Germany took a hit in GDP relative to decreasing exports in automobile and industrial industries. Europe and Germany have seen no benefit from the U.S.-China trade war as hopes that Beijing would substitute American imports have dwindled. Slowdowns in new orders for German imports and world trade have been declining by the fastest pace since 2007. Germany’s automobile industry faces further issues regarding the implementation of new global emissions standards and low investment in innovative technologies for electric and hybrid cars.
GDP Drop: In the second quarter of the year, Germany’s gross domestic product (GDP) declined by 0.1%. Germany faces continuous economic performance issues and industrial problems as well as increasing global trade fears. Carsten Brzeski, ING analyst, stated “today’s GDP report definitely marks the end of a golden decade for the German economy. Trade conflicts, global uncertainty, and the struggling automotive sector have finally brought (it)... down on its knee.” In July, Chinese industrial output was at the lowest expansion in 17 years leading to global slowdown and negatively hitting the eurozone. The eurozone presented data showing growth declined to 0.2%.
Economic Recession: The overall decline in GDP by 0.1% is expected to put Germany in a possible technical recession by the end of the year if growth is not spurred. Andrew Kenningham, of Capital Economics, stated, “the bottom line is that the German economy is teetering on the edge of recession.” German exporters could face an even larger ordeal if a Brexit deal does not materialize in October. German markets also saw a significant hit with the yield on benchmark 10-year Treasury TMUBMUSD10Y, with an overall decrease by -5.05% to a record low of -.0624%. The German DAX fell by 1.83% due to increasing concern over greater global economic data. The Federal statistics office presented data showing a decrease in annual growth in the first quarter from 0.9% to 0.4%. Expected overall growth in Berlin is predicted to drop from 1.5% last year to 0.5% by the end of 2019.
Time to Change: Germany’s statistics office presented data showing slowed trade, as exports decreased at a higher rate than imports. The construction sector also declined after initial growth earlier this year. Berlin needs to consider greater fiscal financing and balance budgeting due to the cost of new emissions packages and standards. Germany’s economic slowdown and reduction of exports will impact its neighbors, who utilize its goods, hurting their economic growth. The German government expects economic growth of only 0.5% this year yet refuses to ease fiscal policies that are aimed at reducing public debt. Consumer spending has previously benefited from government tax cutes and employment has remained strong.
https://www.reuters.com/article/us-germany-economy-gdp/shrinking-german-economy-on-edge-of-recession-as-exports-stutter-idUSKCN1V40HT, Michael Nienaber, AUGUST 14, 2019
https://www.marketwatch.com/story/what-germanys-dismal-gdp-number-really-means-for-europe-2019-08-14, Pierre Briancon, Aug 14, 2019