GERMANY: Warning signals of economic fragile situation from damage done to foreign trade

After almost eight years of expansion, the Europe's biggest economy has been stagnating since the summer of 2018 and may face a technical recession after the GDP contraction of 0.1% q/q in the 2nd quarter. Foreign trade slowed down economic growth. The economy relies heavily on exporters that are strongly China and USA oriented. Close to half of Germany's 1.79 trillion $ export come from machinery sales that are suffering from the global decrease of this specific investment. Furthermore, exporters fear the consequences of a no-deal Brexit from the European Union by the UK.

The mechanical engineering sector is experiencing a cyclical downturn after almost a decade of upswing. There is hesitancy to invest in the automobile industry at present, with manufacturers postponing decisions due to the profound changes in the sector and to indecisions about the technological orientation (e-mobility).

The manufacturing sector has been facing recession since the middle of 2018 following to decreasing orders (May 2019: -2.2% m/m, -8.6% y/y) and production capacity utilization. A growing number of industrial firms are employing or at least planning to make use of larger short-time work program to retain their skilled workers. In the service sector, Deutsche Bank has planned to cut 18’000 jobs amid a radical strategic overhaul.

Despite the recessive trend on the capital goods production, the economy still shows low unemployment and a budget surplus. The construction and the services sectors remain strong, benefiting from households’ incomes still rising (pay increases) and supporting domestic consumption, low interest rates and borrowing costs and increasing public demand.

According to some analysts, a rapid reduction in income tax for employees (consumption incentives) and a public investment program (infrastructure, education and climate protection) would help mitigate the current slowdown. So far, the government has seen no need for more fiscal stimulus.

September 2019