German Economy in Risk of Recession Amid Weak Demand, Tariff Threat, and Epidemic

Germany, the economic powerhouse of Europe, is facing renewed challenges that may soon push it towards recession. Falling industrial production and dwindling factory orders are the prime cause of concern. The negative results have been announced on the backdrop of weak demand from Eurozone countries, U.S. threats for import tariffs, and the fallout from the coronavirus outbreak that has already closed down VW plants in China.

Also read: 41 German Banks Now Charge Negative Interest Rates

Germany’s Industrial Output Slumps 3.5%, Orders Down Over 2%

Industrial production in the Bundesrepublik has declined 3.5% in December 2019, much more than an estimated 0.2%, Bloomberg reported. And data compiled by the Trading Economics website shows that the output has fallen a staggering 6.8% over the same period for the previous year, the highest number in a decade. German industrial orders also slipped last month by 2.1% over November, the Federal Statistics Office said, quoted by Reuters. That’s another unexpected drop, the biggest since February, contrasting the agency’s consensus forecast for a 0.6% rise.

The Federal Ministry for Economic Affairs and Energy pointed out that significant fluctuations in foreign demand for large transport equipment caused about a third of the decrease, noting that the outlook remains subdued. Manufacturing is the leading industrial sector in Germany accounting for almost 80% of total production, with machinery and motor vehicles each contributing 12%. With limited activities during the Christmas holiday season, construction, which is at 11%, was also responsible for the poor monthly results.

German manufacturing, which relies heavily on exports, was affected by weaker demand from other Eurozone countries in December, while uncertainty surrounding Brexit and trade disagreements with London related to the U.K.’s decision to leave the EU further exacerbated the situation. Elsewhere in Europe, other major economies reported declining production numbers as well, including France with a 2.8% drop. The French economy took a hit from protests and strikes in the past couple of months. Manufacturing also shrank in the Netherlands (1.7%) and Spain (1.4%). With markets reacting to these indicators, the common European currency fell Friday to its lowest level since October, at $1.0966.

China Slowdown Due to the Coronavirus Outbreak Hurts Germany

Other external factors have also contributed to the trends in Europe and Germany in particular. While tensions between the U.S. and China over trade have started to subside, President Donald Trump’s administration has threatened to impose tariffs on European imports again. Such a development would be very negative for German car manufacturers, for instance. Another serious problem that increases uncertainty is the coronavirus outbreak in China. Volkswagen was forced to close plants in the People’s Republic because of the growing epidemic. In a report on the crisis, the Munich-based Ifo Institute for Economic Research estimated that a slowdown of one percentage point in Chinese growth could translate into a 0.6-point drop in Germany.

Taking into account the risks for auto sales and manufacturing in general, observers have started to reconsider their estimates about Europe’s locomotive. German economy may have slowed down significantly towards the end of last year and even contracted. In 2019, it barely avoided recession with seasonally-adjusted growth of 0.1% in the third quarter, following a negative 0.2% in the previous three months. The latest GDP figures are expected next week. The released industrial output numbers have “raised the risk that next week’s GDP data could bring back the R-word for the German economy,” commented ING Germany’s chief economist Carsten Brzeski. Quoted by Bloomberg, he added that “2019 was definitely a year to forget for German industry.”

Calls are mounting for Chancellor Angela Merkel to loosen the purse strings. The German state still collects more than it spends with a federal budget surplus of €13.5 billion ($14.7 billion). Her coalition government, however, remains split on the matter, with its conservative wing insisting on corporate tax cuts while her deputy and finance minister, social democrat Olaf Scholz, supporting increased government spending. He shares this position with the new management of the European Central Bank under President Christine Lagarde. Governments which can afford to increase spending should be prepared to do so, Lagarde was recently quoted stating. The ECB pumps €20 billion a month into the economic system of the Euro Area through an open-ended bond buying commitment. Yet the Eurozone economy expanded only 1% year-on-year in the fourth quarter.

What are your expectations about the state of the German economy in 2020? Share your predictions in the comments section below.

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