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The German economy is at the cusp of recession
Now 30 yrs after the fall of the Berlin Wall, and 29 years after Germany was reunified into 1 country, Europe’s strongest economy is facing significant headwinds that risk spilling over into the rest of the EU and the world
The closely watched PMI for October remained near 7-year lows, while service-sector activity was at its weakest pace in 3 years.
Look at the industrial sector, it remains a big headwind suggesting that the weakness of global trade, but also the homemade troubles in the German automotive sector, continue to weigh on this pivotal industry.
“The biggest problem is uncertainty, including that caused by the Chinese-US trade war,” Finance Minister Olaf Scholz told reporters in August.
Germany’s economy is inexorably linked to the world economy and the economy of the United States. It is the 5th largest economy in the world, the largest consumer market in the Eurozone, and is the largest European trading partner for US goods, according to the Commerce Department.
A slowdown there impacts Germany’s neighbors but the United States and China.
China is Germany’s largest trading partner, exchanging some €199-B ($220-B) in goods, according to statistics from Germany’s Foreign Office.
It is the biggest foreign market for German car makers BMW (BMW.DE), Volkswagen (VOW3.DE) and Daimler (DAI.DE), which earned “up to 50% of their global profit there,” the Foreign Office says.
VDMA, Germany’s mechanical engineering industry association, calls China the most important market for exports of German machinery, which are used in many Chinese factories.
“We hope that there will be a solution in the trade dispute with the United States since it affects everybody,” German Chancellor Angela Merkel told Chinese Premier Li Keqiang in September.
But Germany has been reluctant to spend preemptively with a recession on the horizon. The last time the government opened the taps was in the wake of the Y 2008 financial crisis, and this time Finance Minister Scholz has signaled they could spend upwards of $55-B to ensure a soft landing. They are unlikely to take action before a full recession is our call.
“Any further stimulus appears unnecessary, unless a perceptible deterioration in the economic outlook becomes apparent,” Bundesbank President Jens Weidmann told the Council on Foreign Relations in October.
“Germany has driven itself into a kind of complex situation where its own fiscal rules basically prevent it from doing pre-emptive fiscal stimulus before the country falls into recession,” Mr. Rakau said.
That is a difference of philosophy from the US, where the Fed is actively working to hold off a recession. Fed Chairman Powell said there are “no recent precedents” to guide the Fed’s response.
“While monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade,” Chairman Powell said in August.
Despite the headwinds, Mr. Rakau remains optimistic on Germany’s future. The downturn is not widespread, yet, with Germany’s domestic economy remaining strong, especially in areas like construction.
“What we are not really seeing yet is the risk of a broad and sustained downturn, given how much for now at least this weakness has been concentrated in the industrial sector,” he said.
And he believes German fiscal prudence will win out in the long run.
“Germany has been fairly well-run as a nation and has been going through the quite challenging, at times, economic time of the past 10 to 20 years
The country has gotten all through that phase quite well, given that it has relatively sensible governance and parliament. So from that perspective, we think that’s going to continue into Germany staying a quite competitive place to do business.”
Have a terrific weekend
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