LDN - Business

'Suffering' German economy narrowly escapes recession in third quarter

[November 14, 2019] By Michael Nienaber and Rene Wagner

BERLIN (Reuters) - The German economy narrowly avoided an expected slip into recession in the third quarter as consumers, state spending and construction drove a 0.1% quarterly expansion in Europe's largest economy.

On an annual basis, German gross domestic product expanded 0.5% from July through September after a 0.3% expansion in the previous three months, seasonally adjusted figures from the Federal Statistics Office showed on Thursday.

"The German economy got away with a black eye: the technical recession could be avoided," Deka bank analyst Andreas Scheuerle said. But he added that it is still too early to give the all-clear.

The economy is "suffering from enormous global political uncertainty" and its flagship industry, the automobile sector, is not running smoothly anymore, Scheuerle said.

Manufacturers, whose exports have been a bedrock of German economic strength for decades, are struggling with weaker foreign demand, tariff disputes sparked by U.S. President Donald Trump's trade policies and business uncertainty linked to Britain's decision to leave the European Union.

The automobile sector, a key driver of overall growth, is also having trouble adjusting to stricter regulation following an emission cheating scandal and managing a broader shift away from combustion engines toward electric cars.

"We do not have a technical recession, but the growth numbers are still too weak," Economy Minister Peter Altmaier told ARD public television.

FISCAL STIMULUS

Finance Minister Olaf Scholz has suggested abolishing the Soli income tax surcharge for most employees from 2021, which could boost household spending by providing overall stimulus worth about 10 billion euros a year.

Speaking to the Bundestag lower house of parliament, Scholz defended his decision that high-income people should continue to pay the 5.5% surcharge. Despite criticism from Chancellor Angela Merkel's conservative bloc, lawmakers passed the plan with the support of majority of the ruling coalition.

The BDI industry association called on Berlin to abolish the surcharge for all employees and bring the move forward to 2020 - a move which would cost the government another 10 billion euros.

"The federal government must do more to increase public investment and improve conditions for private investment," BDI Managing Director Joachim Lang said.

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A construction worker is pictured at the construction site of the new terminal 3 of Frankfurt Airport in Frankfurt, Germany April 29, 2019. REUTERS/Ralph Orlowski

France, where growth this year is expected to overtake that of Germany thanks to its more domestically driven economy, has already implemented a package to counter the "yellow vest" protests of the last year.

The French package worth 10 billion euros is made up mainly of tax breaks for low-income workers and pensioners this year, followed by a 5 billion euro cut in income tax next year.

The European Commission expects the French economy to grow 1.3% this year while in Germany it expects a 0.4% expansion.

Eurostat said on Thursday that the combined economy of the 19 countries sharing the euro grew 0.2% in the third quarter from the second, giving a 1.2% year-on-year expansion.

SLOWDOWN IN CHINA

Germany's Statistics Office said private households increased their spending from July through September while state spending and construction also supported overall growth.

Exports edged up on the quarter while imports remained broadly flat, the office said, suggesting that net trade could have been a positive impulse on the economy as well.

Alexander Krueger from Bankhaus Lampe said that he expected more meager growth rates in the coming quarters as the trade outlook remained clouded. "The economic slowdown in China, the global trade dispute and the Brexit chaos are all pointing to a weaker economic momentum," Krueger said.

The Statistics Office revised the quarterly GDP rate for the second quarter to a 0.2% quarter-on-quarter contraction from a previously reported 0.1% decline.

But it revised up the growth figures for the first quarter to a 0.5% quarterly expansion from a 0.4% increase reported earlier.

Analysts polled by Reuters for the third quarter had expected a 0.1% contraction quarter-on-quarter and a 0.5% expansion year-on-year in seasonally adjusted terms.

(Reporting by Michael Nienaber and Rene Wagner; Additional reporting by Leigh Thomas in Paris; Editing by Toby Chopra and Hugh Lawson)

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