Germany’s economy, Europe’s largest and its growth engine, has been crumbling under the pressure of domestic woes in the car industry with global trade tensions and the enduring Brexit imbroglio weighing on exports.
True, the exports-driven economy returned to growth in the first quarter as consumers spent more freely and construction activity picked up. Gross domestic product rose 0.4% quarter-on-quarter, according to last week’s Federal Statistics Office data.
But the rebound was largely due to one-off factors and the underlying trend remains weak, according to the Bundesbank. The German central bank pointed to fiscal measures that boosted private consumption, a bounceback in auto sales after production was constrained last year, and mild winter weather that boosted construction.
“These effects, which had largely driven growth after the turn of the year, are expected to lapse or even reverse,” the Bundesbank said on Monday. “Moreover, downturn forces continue to be prevalent in industry, and they may even intensify somewhat.”
Of particular concern is the auto industry. After global car sales dropped for the first time since the financial crisis last year – driven in part by declining Chinese demand and struggles to adapt to new emissions-testing regulations in Europe – the Bundesbank sees few signs that the situation will improve over the long haul.
The automotive sector is unlikely to see demand increase significantly in advanced economies, where car ownership is already high and demographic prospects see limited population growth. While emerging markets show some potential, Chinese car ownership will probably converge rapidly, and US President Donald Trump’s threats to raise tariffs on car imports may also dampen US demand, the Bundesbank said.
The US and China have ramped up their trade conflict, and both countries are important markets for German exporters, meaning the tariffs are hurting their businesses too.
Germany’s economy contracted by 0.2% in the third quarter and stagnated in the fourth. The government has halved its 2019 growth forecast to 0.5% last month. That would mark a sharp slowdown from expansions of 2.2% in 2017 and 1.4% in 2018.
The Bundesbank said a gradual rebound in economic activity is only expected for the second half of the year alongside a global economic recovery. The central bank’s concerns outline that recent weakness in Europe’s largest economy may prove more prolonged in some sectors.
Germany should cut taxes and upgrade its digital infrastructure to reduce its vulnerability to external shocks such as trade protectionism, according to the International Monetary Fund.
The imbalance is reflected in its current-account balance, the IMF said in its country review last week. Germany’s current-account surplus peaked at 8.5% of GDP in 2015 and is only slowly coming down, to 7.3% last year.
The key to righting the economy, lies in wage growth, which has been slow coming despite record-low unemployment, the IMF said.
Germany’s $4.2tn economy is roughly the size of France and the UK, the second and third European Union economies combined; it’s the fourth largest in the world behind the US, China and Japan.
When Germany sneezes, Europe is sure to catch a cold.
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