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Analyst: Germany On Brink Of Recession

Tanzeel Akhtar

The German “export engine” is spluttering and a recession is looking increasingly likely, according to economists. 

Data released Tuesday showed that the German economy contracted by 0.1% in the second quarter. 

“The ongoing trade war has considerably exacerbated the downturn in Germany's industrial sector. Fiscal stimulus can therefore no longer be categorically ruled out. Basically, Germany's export-dependent economy is on the verge of a recession,” said Marc-André Fongern, an analyst at MAF Global Forex.

The analyst said he expects Sino-American trade tensions to intensify, not ease. 

Andrew Kenningham, chief Europe economist at Capital Economics, said a recession is looking increasingly likely.

“There is nothing in the detail of the second-quarter  GDP estimate to allay fears that the German economy will enter a recession in the third quarter, particularly given the weakness of surveys for July and August and the fast-deteriorating external backdrop,” he said in a note. 

Brexit's Impact

The confirmation in the second estimate of Q2 GDP that the German economy contracted by 0.1% is “old news,” according to Kenningham, and so the focus today is on the expenditure breakdown. “This underlined that the main source of weakness was exports, which fell by 1.3% q/q (and 0.8% y/y) whereas imports were down 0.3% q/q. Admittedly, part of this was due to a reversal of the stockpiling in the U.K. prior to the first Brexit deadline, which could prove temporary,” writes Kenningham.

Capital Economics does not expect much of a bounce before the next Brexit deadline, and said exports to all key markets have been soft this year.

The data for domestic demand offered little encouragement. German household consumption edged up by a mere 0.1% quarter-over-quarter.

Investments in machinery and equipment and government consumption both rose by 0.5%.

“The real concern now is that early indications for the third quarter show things getting worse. Although the Composite PMI for August edged up from July, it was still consistent with declining GDP," said Capital Economics' Kenningham. 

The headline Ifo Business Climate Index published Monday fell to a seven-year low, and the detail showed that the services sector is "beginning to falter," he said. 

"The chances are that the economy will slip into recession in the third quarter."

Resilient Eurozone

Robert Bergqvist, chief economist at SEB, said the Eurozone is resilient to German industrial weakness. 

“Fiscal policy will help drive growth, which will accelerate from 1% this year to 1.1% in 2020 and 1.3% in 2021. ECB will ease its already loose monetary policy further, cutting deposit rate by 0.1 percentage points in September and December 2019 to -0.60%,” he said. 

SEB’s economists said their main scenario is still that an outright recession will be avoided. 

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