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Shrinking German economy 'on edge of recession' as exports stutter

Shrinking German economy 'on edge of recession' as exports stutter
FILE PHOTO: Volkswagen export cars are seen in the port of Emden, beside the VW plant, Germany March 9, 2018. REUTERS/Fabian Bimmer/File Photo -
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Fabian Bimmer(Reuters)
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By Michael Nienaber

BERLIN (Reuters) – A slump in exports sent Germany’s economy into reverse in the second quarter, data showed, as its manufacturers bore the brunt of a global slowdown amplified by tariff conflicts and uncertainty over Brexit.

Gross domestic product (GDP) fell 0.1% quarter-on-quarter, in line with a Reuters poll of analysts, as one observer raised the prospect of a further contraction in the third quarter and the industrial sector urged the government to kick-start growth by issuing more debt.

On a calendar-adjusted basis, the annual growth rate slowed to 0.4% in the second quarter from 0.9% in the first, Wednesday’s Federal Statistics Office data showed. For 2019 as a whole, the government expects a growth of just 0.5%.

“The bottom line is that the German economy is teetering on the edge of recession,” Andrew Kenningham from Capital Economics said, noting that exporters were facing an even bigger potential hit if a threatened no-deal exit from the EU by Britain actually materialised on Oct. 31.

Markets also took fright, with the yield on Germany’s benchmark 10-year government bond hitting a record low of -0.624% <DE10YT=RJR> despite the headline quarterly figure having matched expectations.

The statistics office said that net trade slowed economic activity as exports recorded a stronger quarter-on-quarter decrease than imports.

Construction was also a drag, after the sector pushed up overall growth in the first three months due to an unusually mild winter.

“Today’s GDP report definitely marks the end of a golden decade for the German economy,” Cars ten Brzeski from ING said.

“It was a decade of strong growth on the back of earlier structural reforms, fiscal stimulus, localisation at its peak and steroids provided by the ECB in the form of low-interest rates and a relatively weak euro.”

DOMESTICSAFETYNET?

Domestic demand has become an important growth driver for Germany in recent years as consumers benefit from record-high employment, inflation-busting pay hikes and low borrowing costs.

Positive contributions came from that source in the second quarter, as household consumption, government expenditure and gross fixed capital formation increased on the quarter, the statistics office said.

But analysts suggested the positive impact of those factors was waning.

“For a year now, the German economy has been only crawling forward,” UniCredit analyst Andrea Reese said, with the many uncertainties facing German exporters presaging more pain in the rest of the year.

“Besides Brexit, this is above all the U.S.-Sino trade dispute and possible U.S. tariffs on European cars,” Reese said.

AIG’s Brzeski said that, with trade conflicts, global uncertainty and the struggling automotive sector having “finally brought the German economy to its knees,” a debate about fiscal stimulus would get more heated.

(Reporting by Michael Nienaber ; editing by Thomas Seythal and John Stonestreet)

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