Germany avoids recession, just

By the skin of her teeth, Germany dodged a technical recession in the final quarter of 2018 with growth of zero per cent.

Even so, the latest GDP numbers are a big blow for Europe’s biggest economy, which grew last year at its slowest rate for five years.

As DekaBank economist, Andreas Scheuerle, remarked: “Germany got away with a black eye.” The country’s Federal Statistics Office, Destatis, reports that gross domestic product in the last three months of last year was zero compared to the third quarter, but down 0.6% on the same quarter of 2017.

As feared, the slow-down is blamed on declining global trade, troubles in the country’s huge car industry, but also low water on the Rhine due to one of the longest and driest spells for over a century.  The low water levels on the Rhine meant that its industrial barges could not transport goods from Holland through Germany to Basel on the Swiss border. According to the German website, DW, the water levels on the Rhine in October fell below 30 cms- or 11.8 inches – Kaub, near Frankfurt: too low to lift even the smallest, empty barges along the river.

Low water levels may sound like a quirky detail but for a huge exporting economy which depends on transporting its goods across Europe, the dry weather was of huge significance. The driest year since records began in 1881 saw water levels in rivers and lakes sink to historically low levels. Farmers were also badly hit by the drought.

By far the biggest impact on the GDP figures was the sharp drop in car sales by BMW, Audi and Mercedes. This was due to delays because of new emissions tests but also rows over trade between the US and China and fears that President Trump will turn his attention to the EU. The US is one of Germany’s biggest export markets for cars, far bigger than to China.

Brexit uncertainty was also blamed because of fears for a no deal, with car manufacturers worried by the added costs of trade tariffs. Recent research last year by the IW Institute in Cologne estimated that 5% of German output was directly or indirectly linked to UK trade.

On the plus side though, Germany’s construction industry, business spending and a relatively buoyant domestic economy compensated for the downturns elsewhere, helping the country avoid two consecutive quarters of negative growth, the definition of a technical recession.

However, Germany’s top economists at the Ifo Institute say that although the results are disappointing, the fundamentals remain strong and that a recession is not in sight for 2019.

Ifo’s chief economist, Timo Wollmershaeuser, says the cooling down of German industry was the most decisive factor behind the poor numbers, and was likely to have been in recession during the second half.

Wollmershaeuser added: “The sharp decline in production in the automotive industry in the third quarter was only made up to a small extent in the fourth quarter. In addition, production in all other important manufacturing sectors had shrunk by the end of the year.”

But he said the German economy had left “the peak it reached at the beginning of last year behind it and had entered a downturn in which the over-utilization of production capacities was declining.”

German employment is holding up – its currently at about 3.3%. Economists expect it to beat last year’s record levels. Household income should benefit from higher wages and transfer payments. Ifo also reckons there will be benefits from state spending on investments and defense this year, adding a stimulus of E24bn, while construction will benefit from continued low interest rates.

Yet DekaBank’s Scheuerle warns that the first quarter of 2019 is not looking like it is going to be easy, either, as political uncertainties are weighing heavily on corporate confidence.

Indeed, the German government is so worried for the future of its manufacturing base that economics minister, Peter Altmaier, said recently that the government may take stakes in top companies to prevent them from foreign takeover. It’s particularly worried about the predilection for foreign companies – mainly Chinese – to acquire its technical know-how.

At the same time Bundesbank president, Jens Weidmann, has warned the slump may last longer than feared. That makes it unlikely that the ECB is going to normalise interest rate policy anytime soon. It may look to more stimulus instead.

Germany is not the only country suffering from the global downturn. In the US, markets were stunned by a fall in retail sales of 1.2% in December, the biggest fall since September 2009. That’s a shocker as consumer spending makes up two-thirds of the US economy. Time to tighten our belts?