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Germany Teeters on Recession, But It’s Not All Bad News

Jana Randow
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Germany Teeters on Recession, But It’s Not All Bad News

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Germany’s recent glimmer of hope after a year of industrial doldrums risks coming too late to prevent wider weakness from taking hold.

While an uptick in business expectations and a jump in factory orders have raised the prospect of stabilization, the evidence that manufacturing malaise has begun to affect the domestic economy is mounting. Growth data this week might show Germany either in a recession or just skirting one, underlining that view.

“Spillovers are affecting domestic demand,” said Davide Oneglia, an economist at TS Lombard in London. “Once the train is set in motion, it’s difficult to stop.”

German policy makers have tended to downplay the slowdown that engulfed the Europe’s largest economy in the summer of 2018 as a temporary problem that would be overcome once peace returned to global trade relations and carmakers put their emissions scandal behind. That rose-tinted view has been repeatedly shaken, most recently by forecasts last week showing growth likely to stay muted for the next two years.

The economy probably dipped into a technical recession in the third quarter, shrinking 0.1%, according to just over half of the 39 forecasts in a Bloomberg survey of economists. The rest predict no growth, aside from just three anticipating narrow expansion of 0.1%. Those data will be released on Thursday.

Such downbeat news would contrast with small and belated signs of improvement in manufacturing, where the economy’s troubles originated.

Orders posted a rare solid gain in September, exports as well as export prospects improved, and the outlook for carmakers turned positive in October after nine months of decline. Investor confidence also increased, with an expectations gauge at the highest in six months.

“It looks like Germany is stagnating in Q3,” Ludovic Subran, chief economist at Allianz, told Bloomberg Television. “Most of the indicators that are related to the manufacturing sector are actually stabilizing, but they’re stabilizing at a very low level.”

A recovery at factories might turn out to be too little too late. The labor market is seeing signs of weakening, damping consumer confidence that -- once shattered -- may take time to recover.

Households’ assessment of the economic future is already at a seven-year low, the financial outlook is deteriorating rapidly and fears of unemployment are rising along with an actual increase in joblessness.

“Given the importance of consumption as a growth driver, fueled by employment, you might see a trend of more permanently slower growth projecting itself into the future,” said TS Lombard’s Oneglia. “We may have seen a marginal improvement in manufacturing but the outlook is still uncertain, and being optimistic is just wrong.”

What Bloomberg’s Economists Say

“Our base case is that the economy treads water in the fourth quarter and grows extremely slowly in the first quarter of 2020, before gathering some momentum later in the year.”

--Jamie Rush. Read the GERMANY REACT

Volkswagen has scrapped a forecast for a slight increase in vehicle deliveries this year amid economic jitters in Europe, and the carmaker’s finance chief warned the next two years will be tough. Rheinmetall, Kloeckner and Wacker Chemie are among those who have lowered outlooks. While online fashion retailer Zalando reported a surprise third-quarter profit, its cautious take on the current period sparked expectations that momentum may deteriorate.

The European Commission’s latest report card for Germany is bleak: Foreign demand is likely to be weaker than previously expected, domestic demand is set to be damped by subdued investment, and the labor market will provide a smaller boost to consumption than in previous years.

That assessment translates into projections of just 0.4% growth this year and 1% in each of 2020 and 2021 -- with Italy the only euro-area country forecast to do worse.

Germany’s troubles have sparked calls from the European Central Bank and the International Monetary Fund to step up fiscal spending -- particularly in light of last year’s record budget surplus. The government has pushed back at that, a position supported last week by its economic advisers.

“Adding fiscal stimulus to an already expansionary fiscal and monetary policy, for example with the help of an economic-support program, is currently not warranted,” the council of experts said in its annual assessment. “For now, there’s no reason to expect a broader and deeper recession.”

Whether or not that turns out to be the case, for Christian Keller, head of economic research at Barclays, the country’s struggle to revive growth isn’t going away soon.

“Germany has come to a point where it clearly needs to rethink its economic model,” he said on Bloomberg Television. “It has been a great exporter to the world, emerging markets, Rising China. It has been a great beneficiary of expanded car sales, and I think now it’s at a point where manufacturing, cars -- all these things are in question.”

(Updates with Allianz economist in eighth paragraph.)

--With assistance from Francine Lacqua, Tom Keene, Harumi Ichikura and Anna Edwards.

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Craig Stirling, Zoe Schneeweiss

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