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18-01-2019 | Vision

Germany avoids recession by the skin of its teeth

  • Léon  Cornelissen
    Léon
    Cornelissen
    Chief Economist

The German economy grew by a paltry 1.5% in 2018, its lowest rate in the last five years. Although fourth-quarter data is only published in February, the numbers year to date show – and this has been confirmed by Statistisches Bundesamt – that growth in the final quarter only just managed to remain in positive territory. Given the unexpected contraction in the third quarter, Germany has thus managed to avoid a technical recession by the skin of its teeth. 

A technical recession is defined as ‘two consecutive quarters of negative growth’. However, it is somewhat ironic that for a while the Germany economy seemed to have slipped into a recession at a time when people are wondering when the US economy will finally do the same. A recession of little significance, but still.

The third-quarter contraction was mainly caused by the difficulties German car manufacturers had in meeting new, stricter EU emissions standards. Developments in Germany’s car industry are very important for the economy. But the problems were generally expected to be of a temporary nature and to have passed by the fourth quarter. 

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Trade troubles

Yet November also saw a sharp decline in industrial production. So the problems seem to be dragging on. Nevertheless, it's never wise to underestimate German engineers. Compounding matters, the heavily export-dependent German economy is probably also an indirect victim of the trade tensions between the US and China. The Chinese economy has weakened as a result of the conflict, and this is too putting downward pressure on German exports. 

The most recent noises on the US-China negotiations have been positive and the road is open for ministerial consultations at the end of January. This is likely to reduce the chances of a further escalation. In addition, the Chinese authorities are stepping up their efforts to stimulate the economy.

Tipped to succeed Chancellor Angela Merkel, Annegret Kramp-Karrenbauer – also known as AKK – has also suggested that taxes in Germany should be brought down as a means to counter the economic weakness. While unusual for German politics, this is a welcome remark. Germany’s government finances offer plenty of room for this, at least.

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