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As Ukraine Reverberates, German Economy Shrinks, Diminishing European Outlook

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Germany's economy slowed sharply in the second quarter, crimping activity in export centers such as the harbor in Hamburg, Germany's largest.
  • Why it matters

    Why it matters

    Germany’s economy, which contracted in the second quarter, has the potential to slow European growth.

  • Facts

    Facts

    • Germany’s economy shrank by 0.2 percent in the second quarter after growing 0.7 per cent in the first three months.
    • The euro zone stagnated in the April-June period. Italy shrank 0.2 per cent and only Cyprus performed worse than Germany.
    • Some economists believe Germany could now be in a recession, but most still expect it to rebound in the second half of the year.
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    Audio

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Germany recovered quickly from the global financial and euro zone currency crises to become the reliable economic powerhouse of Europe, a model student delivering solid growth as its neighbors suffered under high public debt and their inability to tackle structural problems holding back growth.

That well-worn storyline was turned on its head Thursday, with news that the German economy shrank by 0.2 percent in April through June after increasing 0.7 percent in the first quarter. Some economists are now predicting Germany may even be in a mild recession, a startling turn partly to blame on the crisis between Russia, the West and Ukraine.

“The German economy may already have fallen into a mild recession because of the crisis,” said Ferdinand Fichtner, the chief economist of the Berlin-based economic institute DIW.

If Mr. Fichtner is correct, the German economy has continued shrinking over the summer. To be sure, unemployment in Europe’s largest economy is still low — at 5.1 percent in June, even less than in the United States — and consumers continue to spend while wages are set to rise.

But companies inside and outside of Germany, spooked by a series of geopolitical crises ranging from Ukraine to the Middle East, are clearly holding back on investments, Mr. Fichtner said.

The second-quarter GDP report has turned Germany from the best to worst performer in the 18-nation euro zone currency area in just three months. Italy shrank at the same rate as Germany in the second quarter and only Cyprus performed worse, contracting 0.3 percent, according to the European statistics agency Eurostat.

The 28-country European Union as a whole grew by 0.2 per cent.

The second quarter GDP has turned Germany from best to worst performer in the 18-nation euro zone currency area in the space of only three months.

But many observers say Ukraine may only slow German growth, which remains strong.

Some analysts said a recession in Germany is unlikely and are predicting a mild rebound in the second half.

Countries such as France, which saw its growth stagnate in the first half, and Italy, which shrank 0.2 percent, have much bigger problems. Germany should soon return to its “above-average performance” in the Eurozone, said Commerzbank chief economist Joerg Kraemer.

A good portion of the downturn is simply due to weather. Germany’s economy grew by a stronger-than-usual 0.7 per cent in the first three months of the year as an unusually mild winter led construction companies to bring forward projects scheduled for spring.

Mr. Kraemer calculated that Germany’s economy would have expanded about 0.15 percent in the second quarter if the weather effect had been removed.

Still, it is clear that Europe’s largest economy has suffered a much bigger blow over the last few months than many expected. A steady stream of economists over the past few weeks have rushed to lower their forecasts for 2014 GDP growth, including Mr. Kraemer, who now expects economic output to grow by 1.7 per cent this year.

 

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Germany’s unemployment rate was 5.1% in June. Only Austria’s rate, at 5.0%, was lower. Source: DPA

A rebound in the second half could also be optimistic if the crisis continues with Russia.

Business surveys have shown that uncertainty is high as Europe and Russia levy tit-for-tat sanctions over Ukraine.

Evelyn Hermann of French bank BNP Paribas said slowing growth in Russia has already had an impact.

“The biggest effect [of the crisis] as of now will be the deterioration in Russia growth,” Ms. Hermann told the Handelsblatt Global Edition in an interview. The longer the crisis continues, the more companies will begin to cancel investments. Uncertainty tends to have a “self-fulfilling aspect to it” the longer it lasts, she noted.

Russia is not the only story.

Economists also point to a worse-than-expected recovery in the euro zone as a whole, not to mention weakness in other parts of the world. Major economies such as the United States, China, Turkey and Brazil have all seen their economies slow in the first half. Thomas Harjes, an economist at Barclays in Frankfurt, said that Germany’s export-intensive economy was always going to be more vulnerable than others to these developments.

“Russia on its own isn’t big enough to fully explain the slowdown we saw. There also has been a bit more global weakness,” Mr. Harjes said. This clearly led to a decline in the exports of German products.

With the United States already showing signs of faster growth, Germany’s exports should begin to recover too, Mr. Harjes said. While turmoil in Russia and Ukraine may be putting a damper on growth, he said he expects a recovery in other key export markets to “compensate” in the second half of thís year.

 

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