Germany On Brink Of Recession As Economy Shrinks In Q2

In the latest sign that the economic powerhouse of Europe is teetering on the edge of recession thanks to the trade war between the US and China, Germany's export-heavy economy shrank by 0.1% in the three months through June, according to official data published Wednesday by Destatis, the country's federal statistics office.

The disappointing economic data - the second contraction in four quarters - comes one day after the ZEW Survey of financial market experts showed that German economic sentiment in August dropped to its lowest reading since 2011, which is stoking concerns that the German economy could slide into recession during Q3.

The industrial sector tipped the economy into contraction in 2Q, said BBG economic Jamie Rush, and there's risk of further weakness in the second half of the year.

"If there’s any good news to take from this release, it’s that services must have continued to expand, indicating patches of resilience persist."

 

Economy Minister Peter Altmaier tried to put a positive spin on the numbers, telling Bild that Germany can avoid a recession if the government responds with the right policies. However, the Q2 data are a "a wake-up call and a warning sign," Altmaier said.

"We are in a phase of weak growth but not yet a recession," he said. "The simmering trade conflicts are taking their toll and Germany’s export-orientated manufacturing sector is particularly affected" Germany needs "intelligent policies for growth," including easing the burden on small and mid-sized companies, cutting corporate tax and a "clear plan" for the complete withdrawal of the so-called "Solidarity Tax."

As the US-China trade war rages, Europe is finding that it's particularly exposed.

Following this latest blow to global growth, the 10s2s Treasury curve inverted on Wednesday morning for the first time since the financial crisis. 10-year bund yields also dropped to near all-time lows of minus 0.624% as traders price in the prospect of more ECB easing.

The weak GDP print has heaped pressure on Chancellor Angela Merkel, who is finishing up her final term in office, to consider fiscal stimulus. But according to the FT, Chancellor Angela Merkel said she didn't see the need for a fiscal stimulus package "so far," though she conceded that "It’s true, we’re heading into a difficult phase...We will react depending on the situation."

Once again, analysts are bandying about the phrase "the sick man of Europe" to describe Germany, per BBG.

"The sick man needs its medicine," Naeem Aslam, chief market analyst at TF Global Markets said. "Hence, the German Chancellor, Angela Merkel, will have to unleash a new fiscal stimulus package for her country to combat the effects of U.S.-China trade war. This may just do some of the trick for the euro-zone’s economy."

Weakness in Germany appears to be rippling out across the region, but with one notable exception: The Netherlands reported surprisingly robust Q2 growth rate of 0.5% as domestic demand remained robust.