The Strategist

Experts: German economy remains pessimistic

08/14/2019 - 10:38

The monthly economic sentiment index in Germany, published by the Center for European Economic Research (ZEW), in August dropped to minus 44.1 points, losing another 19.6 points compared to July. This is the minimum value of the index since December 2011. At the same time, the ZEW economic situation assessment index deepened into the negative zone by 12.4 points for the month, to minus 13.5 points. ZEW economists attribute such low rates to the ongoing trade war between China and the United States and the growing threat of tough Brexit. All this pulls down the already weakened economy of the country and creates additional restrictions on German exports and industrial production (primarily for the automotive sector).

Pessimism of German investors can be explained by a series of negative indicators published since the beginning of August by the federal statistical bureau of the country. In June, industrial production decreased by 1.5% compared with May; the decline was 5.2% in annual terms. The slowdown affected all sectors of industry, except for construction - there was a slight increase of 0.3% after the recession in May and April. June exports fell 0.1% from 1.1% in May, dropping 8% from the same period last year. The country's trade balance in June fell to € 18.1 billion compared to € 18.7 billion in May. This data leaves no hope for economic growth in the second quarter: GDP is expected to decline by 0.1% compared with a growth of 0.4% in January – March. If the trend continues in the third quarter, Germany will face the first recession in six years.

The growth of negative trends will increase pressure on the federal government to mitigate fiscal policy. In 2018, the budget surplus amounted to € 58 billion, or 1.7% of GDP (the highest figure since the merger); by 2021 the public debt is expected to be reduced to 55% from the current 60% of GDP. However, analysts do not expect serious tax incentives under either the current or the next federal government, Capital Economics says. There are practically no possibilities for stimulating growth through monetary policy. ECB believes that one of the reasons for the further reduction in the negative deposit rate is the poor forecast for economy development "in countries where industry is very important."