Downturn fears Temporary German dip or bye-bye boom?

Disappointing growth in the first quarter came on the back of weak economic indicators. The greatest single risk to Germany's outlook has a name: Donald Trump.
It could get really quiet in Hamburg's port.

The mighty German economy, Europe’s largest, unexpectedly slowed in the first quarter, prompting economists to wonder whether this heralds the end of an eight-year-long upswing.

Economic growth halved to 0.3 percent in the first three months of the year, following rates between 0.6 and 0.9 percent in the preceding four quarters. Lower exports and reduced government spending put the brakes on growth, the Federal Statistics Agency said. Analysts had expected the German economy to grow 0.4 percent, or slightly faster than it did.

The disappointing figure comes after leading business indicators had pointed to further weakness in the second quarter. The closely-watched Ifo business climate index fell in April for the fifth consecutive month. And the ZEW research institute’s monthly survey showed economic sentiment among investors remained unchanged at -8.2 points, the lowest since November 2012.

The big question, as always with underwhelming data, is whether this is a dip or the start of a prolonged downturn. Even the more optimistic economists are warning that Donald Trump poses a threat, the biggest single threat in fact, to Germany’s economic outlook. If he keeps stirring up trade tensions and plays hardball with companies doing business with Iran, Germany’s export industry will be in for some major setbacks.

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In the past 12 months, a further risk has emerged in the 44 percent rise in oil price in euro terms. A barrel of Brent crude now costs €65 ($77), up from €45 before. Hikes in oil prices typically take a few months to have their full impact on the economy.

The chief economist at Commerzbank, Jörg Krämer, said that even his cautious forecast of 2.0 percent growth this year is looking shaky. “The growth figure is worse than it looks at first sight,” he said. Meanwhile, Deutsche Bank analysts lowered their full-year outlook to 2.0 percent from 2.3 percent earlier.

To be sure, most other economists remain upbeat. “The upturn has cooled off a little, but it remains intact,” Clemens Fuest, head of the Ifo research institute, told Handelsblatt. “Stronger growth is likely in the coming months.” Others point to the growing number of people with jobs, meaning higher wages and household spending are in the pipeline.

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But there are too many imponderables to get a clear picture. Interest rates in Europe aren’t expected to rise in the near term, but they’re already increasing in the US. That could spell problems for highly-indebted companies in countries like China, which in turn would hurt German exporters.

“The fact is that such growth dips have lasted 12 months on average since the start of the 1970s,” said Mr. Krämer of Commerzbank. “We’re in the middle of the growth dip. We won’t be able to relax completely until it’s over.”

 Norbert Häring reports on monetary policy and economic developments. Donata Riedel is an economics correspondent based in Berlin, focusing on budget policy. To contact the authors: [email protected] and [email protected]