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article imageGerman Q2 contraction fires calls to boost public spending

By Tom BARFIELD (AFP)     Aug 14, 2019 in Business

Germany's economy contracted in the second quarter, figures showed Wednesday, highlighting its vulnerability to trade tensions and stoking a debate on higher government spending.

At minus 0.1 percent, the performance matched forecasts from analysts surveyed by Factset, after output grew 0.4 percent in January-March.

Weak growth for Germany places it alongside Britain, down 0.2 percent in the quarter, in a group of trailing European nations.

In the eurozone, Berlin has fallen from being the model pupil to lagging Italy's standstill economy and France which posted 0.2 percent growth.

Recent days and weeks have brought a slew of negative indicators for Germany, with measures of exports and manufacturing especially hard hit.

Machine-tool makers -- the country's second-largest industrial sector after cars -- reported 22 percent fewer orders between April and June, their federation said Tuesday.

Similar factors to those sapping other top industries such as cars and chemical firms are at work, including a global growth and trade slowdown accelerated by political tensions.

But the factory outfitters have also been undermined by an automotive industry transitioning towards electric vehicles away from the combustion engine.

"Trade conflicts, global uncertainty and the struggling automotive sector have finally brought the German economy down on its knees," ING bank economist Carsten Brzeski commented.

While federal statistics authority Destatis will only provide a detailed GDP breakdown later this month, its broad-stroke report showed higher household and government spending supported expansion, while weaker trade was a brake on growth.

- Recession looming? -

Looking ahead, the horizon is cloudy for the present quarter, as showed in the closely watched Ifo business confidence index in late July which hit its lowest level since 2012.

As other indicators hover in the red, a second quarter of contraction and thus a technical recession could be looming, some economists expect.

"With the escalating trade conflicts of the USA, the ever more probable chaos (of) Brexit and the weaker world economy, the perfect storm has been brewing since the summer of last year," said Klaus Borger, an economist at public investment bank KfW.

"The door at least to a technical recession... is wide open," Borger added.

Berlin still predicts growth of 0.5 percent over the full year, while the International Monetary Fund (IMF) is more positive with an 0.8 percent forecast.

But those figures are far below the 2.2 percent growth of 2017 or the 1.4 percent achieved last year.

Defying the threats from abroad, at home an unemployment rate close to historic lows has prompted wage rises and boosted consumption.

- Budget battle -

Multiple threats to growth matched with still-bulging state coffers have already begun to stoke a debate on increased public spending.

"The time looks more than ripe for the federal government to finally change course, use the room for manouevre in public budgets sensibly and follow an agenda to modernise Germany as a site for business," said Claus Michelsen, an economist at the DIW think-tank.

"The state should spend more to move forward projects in the energy and mobility transition, digitalisation and the housing market too."

IMF and European Commission leaders have long pressed Germany to open the purse strings, hoping higher government spending could stimulate demand, increase imports and balance out its massive trade surplus.

But a "debt brake" rule written into the constitution in 2009, at the height of the financial crisis, prevents a massive expansion of government spending beyond present means.

Some politicians in the centre-left social democrats (SPD) -- junior partners to Chancellor Angela Merkel's conservative CDU -- have called into question the coalition government's still more stringent "black zero" budget policy of absolutely no new debt.

"In a marked downturn, (the black zero) would not be appropriate as a guideline," the head of the government's influential Council of Economic Advisers, Christoph Schmidt, told Der Spiegel magazine last week.

But Merkel does not believe the moment has come for large-scale intervention from Berlin.

"I don't see any need for a stimulus package at the moment" even though the economy is in a "difficult phase", she told constituents at a meeting in Baltic coast town Stralsund Tuesday.

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