German economy stuck in weak phase, crisis unlikely: Ministry

The German economy is unlikely to slide into a prolonged recession even as it languishes in a weak growth cycle, the Economy Ministry said on Monday.

The German economy is expected to contract slightly in the third quarter as it did in the April-June period as exports weaken on uncertainties linked to Britain’s planned departure from the European Union as well as trade conflicts.

The technical recession expected in the third quarter will come after nine successive years of growth, fuelled by an export boom mainly to China and more recently a consumption-driven cycle supported by low interest rates in the eurozone.

“A stronger slowdown or a pronounced recession are not to be expected at the moment,” the ministry said. “The export-oriented German industry is facing weak global trade, stagnating global manufacturing and falling demand for cars.”

“The German economy remains in stagnation,” it added. “Economic activity is stuck at the existing level.”

Economists have voiced concern that the slowdown in manufacturing would sooner or later spread to other sectors of Europe’s biggest economy, whose robust labour market is starting to feel the effects of the drag. The ministry said that growth in services and construction was largely compensating for a recession in the export-dependent manufacturing sector.

Chancellor Angela Merkel’s coalition government of conservatives and social democrats has resisted calls for a stimulus package to counter the slowdown.

Germany’s leading economic institutes have slashed their growth forecasts, predicting an expansion of 0.5 per cent this year and 1.1 per cent in 2020.

The government will publish its growth forecasts this week. In April, it predicted growth of 0.5 per cent for 2019 and 1.5 per cent for 2020.

German industrial orders fell more than expected in August on weaker domestic demand, data showed on Monday, adding to signs that a manufacturing slump is pushing Europe’s largest economy into recession.

Contracts for ‘Made in Germany’ goods fell 0.6 per cent from the previous month, with demand for capital goods down 1.6 per cent, the Economy Ministry said. The overall fall compared with a Reuters consensus forecast for a drop of 0.3 per cent.

“The German economy is in the midst of a recession. Today’s data make that clear again,” said Thomas Gitzel, economist at VP Bank Group.

The economy shrank by 0.1 per cent in the second quarter, and recent data have pointed to continued weakness in manufacturing in the third quarter. Most economists define a recession as two straight quarters of contraction.

“The German government will probably come under growing pressure to give up its strict budget policy,” added Gitzel.

The government has so far stuck to its balanced-budget policy, despite pressure from economists and other governments to spend more to boost flagging demand.

Finance Minister Olaf Scholz said last week that Germany would be able to cope with an economic crisis but added that he did not expect a downturn to be as bad as it was in 2008/2009.

“The weakness in demand in industry continues,” the Economy Ministry said in a statement accompanying Monday’s data. “The industrial sector remains subdued for the time being.”

Germany’s export-reliant manufacturers are suffering from a slowing world economy and business uncertainty linked to a trade dispute between the United States and China as well as Britain’s planned but delayed exit from the European Union.

Monday’s weaker-than-expected data added to the sense of gloom around the German manufacturing sector.

A survey released last Tuesday showed the manufacturing recession deepened in September, with factories recording their weakest performance since the world financial crisis a decade ago.

Last Wednesday, leading economic institutes slashed their growth forecasts for the economy for this year and next, blaming weaker global demand for manufacturing goods and increased business uncertainty linked to trade disputes.

The institutes also called on Chancellor Angela Merkel’s coalition government to ditch its budget policy of incurring no new debt if the growth outlook deteriorates. It has so far refused to do so. Merkel’s government has managed to raise public spending without incurring new debt since 2014, thanks to an unusually long growth cycle, record-high employment, buoyant tax revenues and the European Central Bank’s bond-buying plan.

Reuters