LDN - Business

'Black eye' for German economy as it flirts with recession

[February 14, 2019] By Paul Carrel

BERLIN (Reuters) - Germany's economy stalled in the final quarter of last year, just skirting recession as fallout from global trade disputes and Brexit put the brakes on a decade of expansion amid signs that exports will stay subdued for the time being.

Gross domestic product in Europe's biggest economy was unchanged for the quarter, the Federal Statistics Office said on Thursday. That was below the 0.1 percent growth forecast in a Reuters poll and the 0.2 percent expansion achieved by the euro zone as a whole.

"Germany got away with a black eye," DekaBank economist Andreas Scheuerle said.

Many of the country's traditionally export-focused large companies have been hit hard by a cooling global economy and trade disputes triggered by U.S. President Donald Trump. They also face taking a hit if Britain's exit from the European Union next month is a disorderly one.

Steel-to-elevators group Thyssenkrupp on Tuesday warned of a darkening economic backdrop, signaling tough times for its capital goods business as it works through a major restructuring and major car markets go into reverse.

The Economy Ministry said indicators suggested that exports would be subdued in the coming months but that a construction boom was likely to continue and private consumption will remain strong.

"Solid domestic drivers and fiscal stimulus are providing some support at the beginning of the year," the ministry added.

With the German economy having shrunk 0.2 percent in the third quarter a second consecutive quarter of contraction would have met the definition of a recession.

It escaped that by a hairsbreadth but grew just 1.5 percent in 2018, its weakest annual rate in five years. Growth is forecast to shrink further to 1 percent this year, and the country faces a budget shortfall of around 25 billion euros by 2023.

Thursday's data left the euro struggling near a three-month low.

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German carmaker Porsche hosts a photo tour showing the production and the manufacturing of the new Macan in Leipzig, Germany, December 13, 2018. REUTERS/Matthias Rietschel/File Photo

Fallout from the trade disputes and Brexit are weighing on business confidence, which fell for the fifth consecutive month in January.

"A hard Brexit doesn't help anyone," Achim Wambach, president of the ZEW economic institute, told Reuters. "I think the negotiating parties see it that way too and will come to a solution."

Forecasts of around 1 percent growth this year were "realistic", he added.

POLICY PIVOT

Morale is being depressed by weaker demand for German goods and services in China, the euro zone and emerging markets.

Furthermore, the government is concerned that technological innovation and the acquisition of German industrial know-how by foreign companies could erode the manufacturing base on which much of its wealth is built.

Economy Minister Peter Altmaier said last week the government might take stakes in key domestic companies to prevent foreign takeovers - a shift in policy he said was needed to safeguard Germany's prosperity.

With German growth stalling, the European Central Bank is likely put off plans to normalize policy, economists say, and is more likely to provide additional stimulus rather than scaling it back further.

"The upside from today's data is that it can hardly get worse," ING economist Carsten Brzeski said.

"Economic fundamentals remain solid, and from here on, chances of a rebound are still much higher than chances of yet another disappointment."

(Additional reporting by Rene Wagner and Michelle Martin, editing by Larry King and John Stonestreet)

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