Yahoo Finance German economy shrinks for first time since 2015
Fears for the health of the eurozone economy have intensified after Germany, the single currency’s powerhouse, suffered its first contraction in more than three years.
Tough emission tests affecting the country’s strategically important automotive industry, lower consumer spending, and weaker exports triggered by rising global protectionism resulted in the economy shrinking by 0.2% in the third quarter of 2018.
Germany’s first period of falling output since the first three months of 2015, and its worst performance since early 2013, helped drag eurozone growth from 0.6% to 0.2% in the three months ending in September, highlighting the vulnerability of the eurozone to a disorderly Brexit.
The contraction followed growth of of 0.5% in the second quarter, and financial markets expect a bounce-back in Germany in the final three months of 2018 as bottlenecks in car plants during the summer come to an end.
The consultancy firm Oxford Economics said the 8% fall in car production in the third quarter rippled through the motor industry’s supply chains and cut growth by 0.5 percentage points in the third quarter.
Germany has posted average quarterly growth of 0.5% in recent years, and had that trend continued, eurozone GDP in the third quarter would have been 0.4% rather than 0.2%.
Destatis, Germany’s statistics office, said the country’s foreign trade position had deteriorated, with exports falling and imports rising.
It added that there were mixed signals for domestic demand, with German households spending less but firms investing more in machinery, equipment and construction. Government spending was also slightly higher in the third quarter.
The trade weakness was partly caused by temporary factors, including disruption to car production before new and more rigorous emissions tests that came into force in September. Goods exports make up 40% of German gross domestic product – a much bigger proportion than for the next two biggest eurozone economies, France and Italy – making the country particularly vulnerable to the tit-for-tat tariff war between the US and China.
Economists warned there were some worrying structural developments in Germany. Carsten Brzeski, the chief economist based in Germany for the Dutch bank ING, said the worst economic performance since the beginning of 2013 was another wake-up call for the eurozone’s largest economy.
He said: “Problems with the emission norms created severe production problems in the automotive industry, higher energy prices completely erased previous wage increases and also do not underestimate the negative confidence effect from the World Cup.
“We don’t dare to predict the performance of the national football team but at least the automotive sector should rebound in the coming months and somewhat lower energy prices should revamp private consumption. However, the poor export performance, despite a weak euro exchange rate, suggests that trade tensions and weaknesses in emerging markets could continue to weigh on Germany’s growth performance.”
Annual growth in Germany was 1.1% in the third quarter, weaker than the 1.3% predicted by economists and sharply lower than the 2% annual growth rate in the second quarter.
The slowdown came amid signs that the boost to growth provided to the eurozone economy by the European Central Bank has become less potent. Ultra-low interest rates and the money-creation process known as quantitative easing have combined since early 2015 to stimulate activity and reduce unemployment.
Jennifer McKeown, the chief European economist at Capital Economics, said the figures suggested the German economy was on track for growth of 1.5% in 2018, weaker than the research consultancy’s previous forecast of 1.8%.
She added: “We still expect a healthy expansion of about 1.8% in 2019 but there are clear downside risks relating particularly to the situation in Italy. And for now at least, the contraction in German GDP coupled with the Italian government’s refusal to revise its budget plans will add to downward pressure on the euro exchange rate.”
