German economy shrinks amid trade concerns, auto woes

German economy shrinks amid trade concerns, auto woes

German economy shrinks amid trade concerns, auto woes

The German economy shrank by 0.1 percent in the second quarter from the previous quarter as global trade conflicts and troubles in the auto industry weighed on Europe’s largest economy.

The state statistics agency Destatis said on Aug. 14 that falling exports had held back output while demand from consumers and government spending at home had supported the economy. In comparison to the same quarter a year ago, the economy grew 0.4 percent.

Germany’s economy is facing headwinds as its auto industry, a key employer and pillar of growth, faces challenges adjusting to tougher emissions standards in Europe and China and to technological change, while uncertainty over the terms of Britain’s planned exit from the EU has weighed on confidence more generally. British Prime Minister Boris Johnson has said his country will leave Oct. 31, with or without a divorce deal to smooth trade.

Analyst Carsten Brzeski at ING said that trade conflicts and the struggling automotive sector were key reasons why output had fallen. “Increased uncertainty, rather than direct effects from trade conflicts, has dented sentiment and hence economic activity,” Brzeski wrote in an emailed research note.

U.S. President Donald Trump has imposed new tariffs on Chinese goods while seeking a broader trade agreement and has indicated he may impose import tariffs on autos that would hit European manufacturers. Uncertainty over the outcome of those talks and what the future trading regime will look like among the U.S., China and Europe has weighed on business optimism, deterring business spending and investment.

That comes on top of structural change in the auto industry, where tightening emissions regulations in Europe and China and digital technologies are pushing automakers to make heavy investments in battery-powered cars and smartphone-based services, with uncertain payoff.

Germany continues to enjoy low unemployment of 3.1 percent but lower exports have raised concerns that weakening external demand will spread to domestic consumers and businesses.

Slowing growth has also increased debate over the German government’s practice of running budget surpluses. The International Monetary Fund, the U.S. Treasury Department and some economists at home have urged Germany to cut tax burdens and spend more on infrastructure to boost domestic demand. That could make the country less dependent on exports.

On Aug. 13, Chancellor Angela Merkel said that she sees “no need for a stimulus package,” the dpa news agency reported. She pointed instead to plans to remove the so-called solidarity tax, an added income tax aimed at covering costs associated with rebuilding the former East Germany, for most taxpayers.