1. Why is the economy in trouble?
Blame Donald Trump, at least partly. The U.S. president’s trade spats with China and the European Union have rattled Germany’s export firms, which already face tepid demand due to slowing growth around the world. In the second quarter, German exports slumped 1.3%, with household names from Daimler AG to BASF SE and Continental AG cutting their forecasts and painting a bleak picture of the outlook. A still-robust labor market, with unemployment at a record low of around 5%, has helped offset manufacturing weakness and propelled wages higher, underpinning solid domestic demand.
2. Aren’t lots of countries worried about a recession?
Yes, but Germany has particular challenges. Exports account for almost half of the nation’s gross domestic product, and it sells more goods abroad than anyone except China and the U.S. That means it’s highly sensitive to the ups and downs of the global economy. The Ifo institute’s closely watched gauge of business sentiment is near a seven-year low, with manufacturers more pessimistic than at any time since 2009. The recent travails of the nation’s dominant auto sector have also weighed heavily. As well as dealing with the fallout from the diesel emissions-cheating scandal, carmakers and parts suppliers have struggled to manage the shift from the combustion engine to the electric motor. If Trump follows through with his threat to slap tariffs on European cars, it would deal a damaging blow to Germany’s auto sector.
3. How close is Germany to a recession?
The economy may have contracted in the three months through September, according to the Bundesbank, after dipping 0.1% in the April-June period. Two straight quarters of shrinking output -- something that hasn’t happened since 2012-2013 -- would fulfill the criteria for a technical recession. That said, economists do not expect a severe slump like the one triggered by the financial crisis more than a decade ago. Favorable financing conditions remain in place, and domestic demand is solid. There are substantial risks to the outlook, however, including potential disruption from Britain’s planned exit from the EU and tensions in the Middle East. And if manufacturers respond to the slump by firing workers, that could start a snowball effect, with the resulting jump in unemployment crimping domestic demand.
4. Can the government stimulate the economy?
Since they opened the taps after reunification in 1990, Germany’s famously frugal policy makers have only once deliberately ramped up spending to revive growth. In response to the 2008 financial crisis, the government deployed a package of measures worth 50 billion euros ($55 billion) that included subsidies for car buyers and support for companies. Finance Minister Olaf Scholz has said that the same amount would be available again if needed. Germany is unable to effect its own monetary policy since it’s part of the euro currency bloc and beholden to the European Central Bank, so fiscal stimulus is its only independent option.
5. What has the government done?
What sometimes gets forgotten amid all the calls for a stimulus package is that Merkel’s ruling coalition has already enacted fiscal measures that economists at the IWH Institute estimate provided a boost this year worth 0.7% of GDP. Economy Minister Peter Altmaier said at the end of August that the government wants to help smaller companies by trimming the corporate tax burden to 25% from around 30%. But the federal government is only one part of the public sector. Some of the biggest investment gaps are at the regional and local level, where capacity bottlenecks are also a serious issue. Planning offices are overburdened and construction crews already working overtime.
6. Why is Germany so wary of deficit spending?
The belief that living within your means is a necessary virtue is deeply ingrained in the German psyche. The nation is still haunted by the experience of hyperinflation in the 1920s, as well as postwar reconstruction and the price tag of reunification. Germany’s commitment to a balanced budget has allowed it to pare public debt to 60% of gross domestic product -- the lowest of any major European economy -- from 83% in 2010. With pressure for action mounting, Merkel has said her government will react “depending on the situation” but has so far resisted calls for a preemptive move to revive growth.
7. What does this mean for the rest of Europe?
Germany’s fiscal discipline is meant to set an example for the rest of Europe. By sticking rigidly to EU spending constraints, so the thinking goes, Berlin is showing more profligate nations like Italy and Greece the benefits of self-control. But with borrowing essentially free, some economists argue that politicians in Berlin are missing out on the opportunity to ramp up badly needed investment in transport and communications infrastructure, as well as on measures to manage climate change. A recession in Germany would have a ripple effect far beyond its borders, with many of its EU partners heavily dependent on selling their goods into Europe’s powerhouse economy.
8. What about the ECB?
The Frankfurt-based central bank’s loose monetary policy is designed to keep the euro-region economy ticking over. But ECB President Mario Draghi has been portrayed by German tabloid media as a vampire sucking the blood from the nation’s savers. And there is no sign of an end to the era of cheap money. With the currency bloc floundering and inflation tepid, the ECB cut its negative rates deeper below zero on Sept. 12 and reactivated bond purchases. Bundesbank President Jens Weidmann, who represents Germany on the ECB’s governing council, is among policy makers who have openly opposed the stimulus drive.
--With assistance from Jana Randow.
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