It started with a surprising 0.2 percent drop in Germany’s economic output in the second quarter of this year. It may end with years of stagnation for the euro-zone economy and its stubbornly high unemployment levels.
Germany has long been Europe’s economic motor, propping up the continent over much of the last five years as many of its southern neighbors struggled with high debts that almost led to the euro’s collapse. But what has been termed the “second German economic miracle” may now be coming to a halt – with major consequences for Europe as well.
According to Handelsblatt’s sources, a group of four leading German economic institutes on Thursday will slash their own forecasts for German growth for this year and 2015. The institutes will now predict growth of just 1.3 percent this year and 1.2 percent in 2015. That is down from 1.9 percent predicted half a year ago.
Economic data released over the past month points to a major slowdown of Germany’s economy, Europe’s largest and number four in the world.
A recession in Germany is now a distinct possibility, economists believe. With that, the prospects for another recession in the euro zone have increased as well.
On Tuesday, German industrial output showed the strongest decline in August since the height of the financial crisis in 2008-2009, sending stock markets down globally. The Dow Jones, S&P 500 and German blue chip index DAX all fell more than 1 percent on Tuesday, and Japan’s Nikkei index followed suit on Wednesday with a 1.4 percent drop. German industrial orders in August also recorded the sharpest drop since the crisis, data from the Federal Statistics Office showed this week.
“Germany’s economic weakness is getting even more pronounced; it is a worrying development,” said Marcel Fratzscher, managing director of the German Institute for Economic Research in Berlin, or DIW.
“For the whole of 2014, the German economy will not grow by much more than 1 percent,” said Mr. Fratzscher, whose prediction is even more pessimistic than that of the International Monetary Fund.
The IMF lowered its economic outlook for Germany and other countries on Tuesday. Of specific concern are the slashed growth rates of France and Italy, the euro zone’s second and third-largest economies. The IMF halved its forecast for France’s growth to a meager 0.4 percent this year and expected Italy to shrink by 0.2 percent instead of showing growth.
“There is a risk that the recovery in the euro area could stall, that demand could weaken further, and that low inflation could turn into deflation,” the IMF’s Chief Economist, Olivier Blanchard, warned in the organisation’s global economic outlook.
The IMF still sees the euro zone growing at 0.8 per cent this year. But the risk of a euro-zone recession, defined as two quarters of economic decline, in the next 12 months has increased to almost 40 percent from about 20 percent half a year ago, the IMF said.
How well the German economy fares has an immediate impact on the euro-area economy. The country is not only the region’s largest economy, it also imports 39 percent of goods and services from the currency bloc of 18 European countries.
Economists and especially European politicians had hoped that a strong upswing of the German economy would help lift euro-zone economies, in particular those of indebted southern Europe, out of the doldrums.
“From an economic perspective, it’s never a good thing if Germany slows down,” said Carsten Brzeski, a Frankfurt-based economist at ING Bank.
If there is a silver lining to this, it is that weaker German growth could ease the country’s opposition to more aggressive measures to stimulate Europe’s flagging economy, Mr. Brzeski noted. It is also likely to further prod the European Central Bank to consider more drastic measures to revive the euro-zone’s economy, Germany’s Commerzbank said in a research note.
The export-focused German economy itself might even fall into recession, some economists said.
“We expect stagnation in the third quarter, but a small minus cannot be ruled out either,” said Michael Hüther, managing director of the Cologne Institute for Economic Research.
“From an economic perspective, it’s never a good thing if Germany slows down.”
In August, the German economics ministry still blamed the unexpected German weakness on a variety of one-off effects including the crisis in Ukraine, which has also hit exports to Russia, a major trading partner.
But following weak industry figures on Tuesday, the ministry could no longer deny that Germany’s industry was going through a “weak phase” and said it expected lower production to continue through the third quarter.
This weak phase has stepped up pressure on Berlin to take more aggressive domestic policy action. The IMF urged Germany to spend more on infrastructure to boost the growth of its own economy and of the euro zone at large.
The IMF said that, unlike in many other European countries, Germany still has the fiscal space to boost spending. By contrast, debt levels in many other European countries, a legacy from the financial crisis and high unemployment levels, remained a problem, the IMF said.
Its neighbors hope that a pick-up in Germany’s growth and government spending levels could potentially help Europe combat its high unemployment levels. The euro-zone’s jobless rate stood at about 12 percent in the euro area in 2013, compared with about 7.5 percent in 2008, when the crisis first erupted. Some countries such as Spain and Greece are facing unemployment around 25 percent.
Germany’s weaker economic performance also poses a problem for the German finance minister, Wolfgang Schläuble. He may have to ditch his plan for a balanced budget next year if tax revenues suffer from a lower-than-expected growth rate.
The slowdown in Germany also means that Mr. Schäuble and other policymakers may find it more difficult to take a tougher line with their European neighbors. Mr. Brzeski of ING Bank argues that the slowdown could force Germany to relax some of its calls for tough austerity from its partners. France and Italy, for example, account for about 15 percent of Germany’s exports, making them critical for the country’s growth prospects.
“If these two countries continue to stagnate or even worse, that’s clearly something Germany is going to feel,” Mr. Brzeski said.
Norbert Häring, Jan Hildebrand, Markus Koch, Jens Münchrath and Torsten Riecke also contributed to this story. The authors cover economics, politics or stock markets for Handelsblatt or Handelsblatt Global Edition. Contact: Afhüppe@handelsblatt.com, Cermak@handelsblatt.com or Kreijger@handelsblatt.com