Ever shrinking German economy teeters 'on edge of recession'

Germany's economy was sent into reverse in the second quarter with little prospect of an early recovery as the country's manufacturing sector struggles from a global slowdown that has been amplified by tariff conflicts and Brexit insecurities.

Quarter-on-quarter, overall output fell 0.1% according to data released on Wednesday. With pressure growing on a thus far reluctant government to provide more fiscal stimulus, the economy minister said action was needed to prevent a second consecutive quarter of contraction that would tip the country into recession.

The global slowdown, which has been reinforced by China's industrial output expanding at its lowest rate since 2002, has had an impact on the euro zone, with corresponding data showing the growth in the second quarter had halved to 0.2%.

The German economy, Europe's largest, has been traditionally reliant of exports and as such has been especially vulnerable.

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

“Trade conflicts, global uncertainty and the struggling automotive sector have finally brought (it)... down on its knee.”

On a calendar-adjusted basis, annual growth slowed to 0.4% from 0.9% in the first quarter, the Federal Statistics Office data showed, and for 2019 overall Berlin expects growth to drop to just 0.5% from last year’s 1.5%.

The economy ministry described the outlook as being subdued, adding that Britain's scheduled withdrawal from the EU on 31 October was looking ever more likely to be a disorderly one. The Economy Minister Peter Altmaier said the latest figures were a wake-up call.

“We are in a phase of economic weakness but not yet in recession. We can avoid that if we take the right measures,” Altmaier told daily newspaper Bild.

His ministry said impetus was unlikely to come from the industrial sector, whose BDI association - in an unusual move - joined a growing chorus of voices urging the government to kick-start growth by ditching its balanced budget rule and finance more public investments through new debt.

A government spokeswoman said Berlin did not currently see “any need for further measures to stabilise the economy,” which was still expected to grow slightly this year.

Despite Wednesday’s headline quarterly figure matching expectations, markets also took fright, with the yield on Germany’s benchmark 10-year government bond hitting a record low of -0.624%.

“The bottom line is that the German economy is teetering on the edge of recession,” Andrew Kenningham from Capital Economics said, noting that exporters were facing an even bigger potential hit if a no-deal Brexit materialised.

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