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‘Sick Man’ Germany Stumbles To Second Contraction In Four Quarters – Recession Looms

"The impact of weaker growth on the labor market is becoming more visible".

The good news is, it wasn’t any worse than expected. Or at least not at first glance.

The bad news is, Germany is now one more bad quarter away from a technical recession.

As expected, the fourth-largest economy in the world contracted in the second quarter, as German output dropped 0.1%, in line with expectations.

This is the second contraction in four quarters and although Berlin dodged a recession by the slimmest of margins in Q4 of 2018, this time around Germany may not be so lucky.

A string of recent data paints a dour picture. There was Tuesday’s abysmal ZEW confidence print, for instance.

And the business outlook is foreboding:

Manufacturing has obviously fallen off a cliff:

And don’t forget about the worst annual industrial production drop in a decade.

All of this suggests Germany needs stimulus, despite the relative health of the services sector and “robust” domestic demand, as the Economy Ministry put it on Wednesday, in its latest monthly report, which cited trade frictions, Brexit and geopolitical crises as factors weighing on German manufacturing.

“The outlook remains subdued. Trade conflicts have intensified recently and the prospects of an orderly Brexit have not improved”, the ministry said. “The impact of weaker growth on the labor market is becoming more visible”.

“Today’s GDP print broadly confirms the vulnerability of the German economy to external demand slowdown amid elevated trade uncertainty”, Barclays said, adding that while “domestic demand has once again demonstrated remarkable resilience, with the services sector likely expanding at a healthy clip, and making up for most of the trade-related industrial weakness”, it will be important to monitor the labor market in Q3 for “any emerging cracks amid the ongoing industrial recession”.

Last week, the market was abuzz with rumors that the government might be persuaded to loosen the fiscal purse strings and issue debt to fund a climate initiative. While the finance ministry and the Angela Merkel’s spokesman appeared to throw cold water on the news, she appeared to hint at the possibility of a stimulus package at a town hall event in Stralsund on Tuesday.

“It’s true, we’re heading into a difficult phase”, she said, adding that while she doesn’t see the need to take emergency steps “so far”, the government is keeping an eye on things and will “react depending on the situation”. Call it fiscal forward guidance.

Read more: Germany’s ‘Black Zero’ Fiscal Policy Called ‘Voodoo’ As Economy Screams For Stimulus

Until then, expect the cat calls to continue, as analysts, market participants and some German politicians call for stimulus at a time when government bond yields in German are negative.

As one analyst told Bloomberg on Wednesday, “the sick man needs its medicine”.


 

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1 comment on “‘Sick Man’ Germany Stumbles To Second Contraction In Four Quarters – Recession Looms

  1. Or…the tired man needs more cocaine?

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