Relief and fears for future after Germany dodges technical recession

Berlin

GERMANY on Thursday dodged a technical recession with a slight third-quarter growth, leaving analysts divided over whether sunnier skies or further months flirting with a downturn lie ahead for Europe's biggest economy.

Defying forecasts of a second quarterly contraction in a row in July-September, growth of 0.1 per cent was "a hefty, but happy surprise", analyst Jens-Oliver Niklasch of LBBW bank commented. "In recent months, there were growing hints that other economic sectors were not infected by weakness in industry."

Germany's export-oriented manufacturing industries have been sapped by trade wars between the United States, the European Union (EU) and China and Brexit uncertainty, among other factors. But unemployment hovering at historically low levels, rising wages and a strong services sector have limited the resulting pain at home.

As in the past, "positive impulses came above all from consumption" by households and the state in Q3, the Federal Statistical Office (Destatis) said. Exports and construction also expanded, while investments in new equipment fell compared with April-June.

The game of two halves in the German economy has limited trade wars' impact on government growth forecasts. But Berlin is still expecting just 0.5 per cent growth this year and last month revised down its projections for 2020 to a one per cent expansion, compared with previous forecasts of 1.5 per cent.

Pointing to revised second-quarter GDP figures, which showed a sharper fall than previously thought at 0.2 per cent, analyst Andrew Kenningham of Capital Economics warned that "a recession may have been postponed rather than avoided altogether". "Prospects for the coming quarters remain poor," he added.

But most of the uncertainty plaguing German business can be traced to foreign sources, like knock-on effects from the US' massive ramping-up of tariffs on Chinese imports, and fear of Britain crashing out of the EU without a deal.

President Donald Trump has talked up a Washington-Beijing truce in recent weeks, saying on Wednesday that "our trade agreement with China is moving along very rapidly".

Meanwhile, Brexit has been pushed back to Jan 31. A London-Brussels deal is ready to be signed if Prime Minister Boris Johnson secures a majority in elections on Dec 12.

"Economic policy uncertainty across the globe has started to come off its August peak," while indicators "have also started to signal the eurozone downturn could hit the bottom soon," said economist Florian Hense of Berenberg bank. "While all could still go wrong, less bad political news and stabilising data bode well for the German and eurozone economy in 2020."

Given the dangers, calls have grown from economists and international institutions for Berlin to grab a policy lever within its control by boosting spending. Chancellor Angela Merkel's government has since 2014 stuck rigidly to a balanced-budget dogma known as "black zero", even stricter than a "debt brake" rule written into the constitution in 2009.

A panel of expert economists known as the "Wise Men" earlier this month advised Mrs Merkel to loosen the tough no-new-debt policy "in case of a broad, deep recession", although they saw no such danger as yet.

Newly-installed European Central Bank chief Christine Lagarde sent a stronger message on Oct 30. She said "countries with chronic budget surpluses like the Netherlands and Germany" need to increase spending to redress "imbalances" in the eurozone.

Mrs Merkel has so far ignored the growing chorus. During the G-7 summit in August, she said Germany "cannot live sustainably beyond our means" and must be able to finance state pensions for an ageing population. AFP