German Economy Stagnates, Just Barely Skirting a Recession

(Bloomberg) -- Germany's economy stagnated at the end of 2018, just barely avoiding a recession, and continued trade tensions mean any pickup in Europe's powerhouse economy could be muted.

The fourth-quarter performance means the country trailed most of its peers in the euro area, where average growth was 0.2 percent. 2019 hasn't brought much relief so far: disappointing numbers keep rolling in and a slew of institutions have downgraded their outlooks.

A better first quarter might still be in the cards, with economists forecasting growth of 0.4 percent as rebounding car orders and rising water levels signal some one-off growth inhibitors are dissipating. Still, the full-year outlook depends on whether stabilizing trade and Chinese growth can revive industrial momentum.

Just last week the European Commission issued sweeping downward revisions for Germany and many of the euro area's major economies. The region faces a daunting combination of weaker demand for its exports from China and the rest of the world, the prospect of a messy divorce with the U.K., and protracted impact from political unrest in Italy and France.

There was better news from the Netherlands, which reported 0.5 percent growth in the fourth quarter, an acceleration from 0.1 percent in the previous three months.

Germany's economy was bolstered by domestic demand in the fourth quarter. Investment, particularly into buildings but also equipment, rose markedly. Government spending increased significantly from the previous three months, while private consumption was up slightly. With exports and imports rising at roughly the same pace, there was no contribution from net trade.

According to economists at Bank of America Merrill Lynch, the current slowdown may prove temporary but relies “on accidents not happening.” U.S. threats to hike car import tariffs would need to dissipate, the U.K. would have to leave the European Union with a deal, and the Chinese economy would need to stabilize, they say.

Yet business concerns this time are more entrenched than they were during the last growth scare, and that alone could weigh on investment. A gauge for manufacturing is signaling contraction, the Economy Ministry predicts the weak phase in industry to continue and Daimler AG is preparing a “comprehensive” cost-cutting program.

At the European Central Bank, policy makers have signaled they won't rush in with additional stimulus. Officials decided to halt bond buying in December and are waiting to see how to economy evolves before deciding to raise interest rates.

The domestic euro-area economy remains “pretty strong,” according to Irish central-bank governor Philip Lane, who is set to replace Peter Praet as ECB chief economist in June. GDP figures for the euro area are due at 11 a.m. Frankfurt time and will likely confirm growth of 0.2 percent in the fourth quarter.

--With assistance from Kristian Siedenburg, Harumi Ichikura, Catarina Saraiva, Ruben Munsterman and Zoe Schneeweiss.

To contact the reporter on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana Randow

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