The Strategist

Eurozone economy slows down, no recession expected

11/15/2019 - 08:37

The German economy avoided recession in the third quarter, but its growth was extremely weak, amounting to only 0.1% of GDP quarter-on-quarter and 0.5% in annual terms. The sharp decline in industry was partially offset by an increase in consumption, as well as growth in construction. However, given that the trade disputes that hit the country's exports are still far from being resolved, experts expect the stagnation to continue.

European Union Naval Force via flickr
European Union Naval Force via flickr
The growth of German GDP in July-September amounted to 0.1% in quarterly terms, while the data for the second quarter were revised downward - to minus 0.2%; on the contrary, the data on the first quarter was upgraded to 0.5%, the Ministry of Economy reported. If the growth in the third quarter was negative, it would mean that the largest European economy into a technical recession (negative growth rates for two consecutive quarters). In annual terms, the figure rose by 0.5% (with the seasonality removed). "Indicators do not yet indicate a recovery, but business activity is the first sign of improved expectations," the agency said in its report.

According to the official forecast, the German economy will grow by 0.5% this year and 1% next year.
At the same time, the October forecast of the International Monetary Fund (IMF) assumes that German GDP will increase by the same 0.5% this year (the forecast was higher in April - 0.8%). For the Eurozone as a whole, the IMF assessment was reduced from 1.3% to 1.2% against 1.9% a year ago, while the forecast for 2020 and 2021 was also reduced to 1.4% from 1.5%. In comparison, for Italy, whose economy is on the verge of recession due to political uncertainty and risks associated with a high debt burden, the forecast has been reset for this year (with an increase of 0.1%) and lowered from 0.9% to 0.5% for the next year. The IMF also lowered the growth forecast for 2020 and 2021 for France, the second largest economy in the block - to 1.2% from 1.3% earlier.

The main weakness of the German economy lies in its industrial production, which fell by 5.3% over the year, including by 0.6% in September. The uncertainty associated with trade wars and the weakening of demand for German goods in China has a negative impact. At the same time, the activity of investors increased in November, as the risks of Brexit without an agreement decreased, and the possible introduction of U.S. protective duties on imports of cars was postponed. Last week Head of the U.S. Department of Commerce Wilbur Ross said that the tariffs may not be raised, as the plans of European manufacturers to invest in the U.S. can eliminate the need for them.

"In the third quarter, the main drivers of growth in Germany were consumption, construction and exports, while the investments were in decline," ING Bank says. The bank's experts point out that the industrial production still has too few signs of recovery after the recession that began in the summer of 2018. Consumption, on the contrary, is supported by low rates, low inflation and stability of the labor market. Later on, ING considers the continuation of stagnation as the most likely scenario. However, after a decade of growth, such a scenario is not threatening - so the government is in no hurry to announce new stimulus measures, maintaining a zero budget deficit. At the same time, the European authorities traditionally rely on the German economy as a growth driver for the European economy. Last week, Head of the ECB Christine Lagarde called on Germany and the Netherlands to increase government spending with a stable surplus.