Germany sees no need to loosen the purse strings yet (Sebastian Kahnert)

Frankfurt am Main (AFP) – Germany’s economy contracted in the second quarter, figures showed Wednesday, highlighting its vulnerability to trade tensions and stoking debate on higher government spending.

As the US-China trade conflict intensifies, some economists have urged Berlin to fork out cash to avoid a recession.

However, Chancellor Angela Merkel and her ministers have said things were not yet bad enough to warrant loosening the purse strings.

Shrinkage of 0.1 percent meant the economy lost significant momentum compared with the 0.4 percent growth seen in January-March.

In a year-on-year comparison, it was just 0.4 percent larger than at the end of June 2018, with flat or negative growth in three of the past four quarters.

While overall activity was supported by rising household and government spending, falling exports weighed on manufacturers, statistics authority Destatis said.

“The smouldering trade conflict is taking its toll — and export-focused German industry is feeling it especially keenly,” economy minister Peter Altmaier told top-selling daily Bild.

Nevertheless, “there is no sign of a significant downturn,” the close Merkel ally added.

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

One data point that shores up politicians’ confidence is unemployment, close to historic lows at 5.0 percent and prompting wage rises and higher consumption.

– Recession looming? –

Growth fell back to 1.4 percent last year after a surge to 2.2 percent in 2017.

For 2019, Berlin and international organisations like the International Monetary Fund predict expansion between 0.5 and 1.0 percent.

In the near term, downward trends in confidence indicators and hard data have prompted many economists to foresee further shrinkage in July-September, making for a technical recession — two successive quarters of negative growth.

“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.

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.

As well as trade conflicts, its pride-and-joy car industry is struggling with consumer and government pressure to reduce emissions of gases that harm health or the climate, making massive bets on new battery- and hybrid-powered vehicles.

– Budget battle –

The 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 (and) use the room for manouevre in public budgets sensibly,” 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 coalition partners to Merkel’s conservative CDU — have called into question the government’s still more stringent “black zero” budget policy of absolutely no new debt.

They were joined Wednesday by the influential Federation of German Industry (BDI).

“The debt brake anchored in the constitution is more vital than reaching the so-called black zero,” BDI director Joachim Lang said in a statement.

“Germany must now change gears in fiscal policy” with “strong stimuli for public and private investment”, Lang urged.

Separately on Wednesday, EU agency Eurostat reported that growth in the 19-country eurozone slowed to 0.2 percent in the second quarter after expanding 0.4 percent in the first.

Disclaimer: Validity of the above story is for 7 Days from original date of publishing. Source: AFP.