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German economy: GDP shrinks in the second quarter as trade slows



GDP for the three months ended June fell 0.1% compared to the previous quarter, in line with analysts' expectations. This is down from 0.4% growth in the first three months of the year.

"Today's GDP report definitely marks the end of a golden decade for the German economy," said Carsten Brzeski, chief economist in Germany at the Dutch bank ING.

The world's fourth largest economy, and Europe's largest, has been hit by what analysts have described as a "perfect storm" of negative factors.
Germany relies on exporters selling a large amount of goods to China and the United States, locked in a bitter trade dispute. Weak global car sales have also hit the country's car manufacturers, and fears of a disorderly Brexit remain a drag.

A challenging backdrop

The German economy has helped support growth in Europe following the global financial crisis.

However, industrial production for June fell over 5% compared to the previous year. And the ZEW economic mood indicator for August fell sharply, hitting the lowest level since December 201

1.

Brzeski said the uncertain climate was a top negative factor. "Increased uncertainty, rather than direct effects of the trade conflicts, has hampered emotions and thus economic activity," he said.

Another key issue is the global decline in car demand – especially in China, where new car sales have fallen for 13 consecutive months. There is a major problem for German carmakers like BMW ( BAMXF ) Daimler ( DDAIF ) and Volkswagen [19659010] ( VLKAF ) that has come to depend on the world's largest vehicle market.
It is particularly damaging at a moment when Germany's automakers have to make major investments for building cleaner cars, said Oliver Rakau, chief German economist at Oxford Economics.

Throw Brexit into the mix, and the outlook for Germany's economy looks bleak. Still, Rakau said he expects a return to "modest" growth in the current quarter, aided by "resilient" domestic demand.

"The main question is really how exports and industry will do," he said. [19659002]

What happens next

The weak data strengthen the case for the German government spending more on stimulating the economy next year, Rakau said. But it is far from a safe bet in a country that is notoriously wary of borrowing.

The government may face greater pressure to intervene if the US-China trade war continues.

The Trump administration on Monday said it would delay tariffs on some consumer goods exported from China, including cell phones, toys and video game consoles. However, both sides are not looking closely to come to an agreement that will eliminate existing tariffs. A new round of taxes on Chinese exports is still set to take effect in September.

Germany's contracting economy also strengthens the case for the European Central Bank to take action when it meets in September.

Economists predict that the central bank will move to cut interest rates, which are already at historically lowest levels. The ECB is also expected to signal that it will launch a new acquisition of bond programs designed to stimulate economic growth.


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