Germany's 'golden decade' of economic growth comes to an end
Last week Britain revealed a surprise economic contraction, this week it was Germany’s turn, as the industrial powerhouse of Europe saw its economy shrink in the second quarter and the outlook for the whole of the EU turned darker.
The once-unassailable export machine that is Germany saw output fall 0.1pc in the second quarter from the first, and that means its economy posted its slowest growth in six years in the first half of 2019, at just 0.4pc, according to data released on Wednesday.
“Today’s GDP report definitely marks the end of a golden decade for the German economy,” said Carsten Brzeski, chief economist for Germany at investment bank ING.
He noted that Europe’s largest economy had grown by 0.5pc each quarter on average since the end of the 2008-09 recession and had posted positive numbers in 35 out of the past 40 quarters.
“It was a decade of strong growth on the back of earlier structural reforms, fiscal stimulus, globalisation at its peak and steroids provided by the European Central Bank in the form of low interest rates and a relatively weak euro,” the ING economist said.
Even though the drop in output had been widely expected and was in line with the forecasts of most economists, the news still caused German 10-year Bund yields to hit an all-time low of minus 0.628pc, reflecting the concerns outlined by Mr Brzeski, as well as global growth worries.
Timo Wollmershauser, head of forecasts at Ifo, Germany’s largest and most influential economic think-tank, warned that the declines being seen in the industrial and export sectors were spreading, and he called for the suspension of a ‘solidarity tax’ levied on companies and consumers at a rate of 5.5pc to finance investment in the former East Germany.
“The ongoing weakness in industry is gradually spreading to other sectors of the economy,” he said.
Germany was not alone in seeing sharp moves in its bond market, as 10-year US treasury yields dropped eight basis points to 1.62pc, and dipped below 1.63pc on two-year paper for the first time ever.
The same happened in Britain, where two-year gilt yields rose to 0.478pc and 10-year paper dropped to 0.475pc.
The economic gloom was not confined to Germany, as eurozone industrial production fell 1.6pc month-on-month in June, according to Eurostat.
“The weakness was particularly concentrated in capital goods, output of which fell by 4.0pc month-on-month,” said Andrew Kenningham, chief Europe economist at Capital Economics.
“On the basis of past form, the latest business surveys such as the manufacturing PMI suggest that the industrial recession in the eurozone will drag on for some time to come,” Mr Kenningham said.
The run of poor data and the likelihood of more to come has set the ECB on a path to cutting interest rates at its September meeting to try to stop the eurozone sliding back into a deep recession.
Lower growth prospects across the world, thanks mainly to the trade war that Donald Trump has launched, have already pushed the Federal Reserve to its first rate cut in a decade.
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