German economy faces recession fears

FILE - In this Dec. 4, 2011 file picture a person passes the logo of German Commerzbank in Frankfurt, Germany. (AP Photo/dapd, Thomas Lohnes, File)

BERLIN: Three years into the eurozone debt crisis, the gravity-defying German economy has stalled, with some fearing it could fall into recession in the second half of this year.

Over the past week, Europe’s largest economy has been hit by a series of increasingly gloomy data releases showing declines in manufacturing orders, industrial output, imports and exports.

In a stark warning Friday, the Economy Ministry said these figures and a sharp drop-off in business sentiment in recent months pointed to “significant risks” to Germany’s outlook.

Next Tuesday, gross domestic product data for the second quarter is expected to show modest growth of about 0.2 percent. But the danger of recession in the second half of the year is growing, leading economists say, at a time when Europe’s single currency bloc desperately needs growth from its economic powerhouse.

The slowdown carries risks for German Chancellor Angela Merkel, who will seek a third term in an election one year from now, and could influence public opinion on her crisis-fighting strategy, especially if a nascent rise in unemployment accelerates.

“The German economy is losing momentum – there’s no doubt about that – and in the third quarter the economy will shrink compared to the second quarter,” said Joerg Kraemer, chief economist at Commerzbank.

“Things will go downhill from here. The German economy is not faring as badly as the rest of the eurozone but it can’t disconnect itself, especially as growth in China has slowed and continues to do so.”

Germany is known for its export-driven growth, but the euro crisis has hit its biggest market. Roughly 40 percent of the country’s exports go to its partners in the currency zone and 60 percent to those in the broader EU.

China, one of Germany’s fastest growing markets representing roughly 7 percent total exports, is also slowing. Chinese data this week showed factory output rising at its slowest pace in three years, new loans at a 10-month low and export growth grinding to a halt.

The hope heading into 2012 was that private consumption would compensate for the widely expected decline in German exports. Low interest rates, a robust labor market – German unemployment stood at just 6.8 percent in July – and strong wage rises for both the public sector and manufacturing industry were expected to fuel domestic demand.

But recent data has been disappointing, with retail sales falling back.

Last month, the chief executive of Germany’s Metro, the world’s No. 4 retailer, said retail conditions were worsening, with worries over the debt crisis overshadowing other factors that might encourage Germans to spend.

Markus Schrick, head of Korean carmaker Hyundai’s German division, told Reuters he expected a sharp slowdown in sales in the second half of 2012 as customers became more cautious about spending.

“The situation is difficult at the moment, there’s no doubt about that,” he said. “We’re bracing for more difficulties ahead.”

Peter Bofinger, one of five “wise men” who advise the government on the economy, said recent industrial output data suggested the country was on the verge of a technical recession.

“It’s not the case that Germany can counter the weaker international economic situation with its own dynamism,” Bofinger told Reuters.

It is too early to predict how the looming slowdown could affect Merkel’s prospects for 2013 or influence the intense debate in Germany over giving aid to struggling euro partners such as Greece and Spain.

A poll for public broadcaster ARD earlier this month showed 63 percent of Germans believe the economy is in good shape.

The main reason for that is the robust labor market. Figures published Friday showed youth unemployment in Germany stood at just 7.9 percent in June, compared to a European average of 22.6 percent.

A version of this article appeared in the print edition of The Daily Star on August 11, 2012, on page 5.




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