German economy contracts as trade tensions take toll on industry

[FRANKFURT] Germany's economy shrank in the second quarter, piling pressure on Chancellor Angela Merkel to unleash fiscal stimulus as manufacturers reel from a US-China trade war.

Output fell 0.1 per cent from the previous three months, in line with forecasts, as exports slumped. The economy has contracted in two of the last four quarters. Merkel said Tuesday the country was heading into a "difficult phase" and even hinted her reluctance to respond is softening.

The contraction in Europe's largest economy is weighing heavily on a region struggling to sustain momentum. Growth slowed in most euro-area countries including France and Spain, Italy is teetering on the verge of recession, and profit warnings from some of the bloc's biggest companies suggest little sign of a turnaround.

The latest downbeat economic numbers come a day after Henkel AG issued a profit warning that summed up Germany's woes. The industrial firm is facing pressure on two fronts, a slowdown in the auto industry and weaker demand in China, the same environment that's crippled manufacturing across the country.

US President Donald Trump on Tuesday delayed the imposition of some new tariffs on Beijing by three months to December, buoying markets. However, there was further bad news from China, the world's second-largest economy, on Wednesday, with cooling retail sales and the slowest growth in industrial output since 2002.

In Germany, sentiment among executives and investors has plunged, suggesting a government forecast for growth of 0.5 per cent this year, the weakest since 2013, might still be too optimistic.

The European Central Bank has already all but committed to hand out fresh stimulus to jump-start the economy and is forecast to cut interest rates as early as September. All that has helped push yields on German debt to record lows below zero. Earlier this month, the euro fell to the softest since mid-2017.

ECB President Mario Draghi has been among the chorus of international voices pleading with Germany to loosen the purse strings after running surpluses over the past half decade.

German industry has been mired in a slump as worsening trade woes and weaker global growth sap demand for machinery and cars. Industrial production suffered its biggest drop in a decade in June, and freight volumes at German airports saw the steepest decline since 2012.

Among the casualties is Siemens, which said earlier this month it would struggle to meet financial goals because of a deteriorating economy and heightened political uncertainty. Automotive supplier Rheinmetall also lowered its outlook, scrapping expectations for a "tangible" recovery in the coming months.

BLOOMBERG