Europe's economic motor Germany sputters in Q2

14th August 2014, Comments 0 comments

The German economy, Europe's biggest, stalled in the second quarter, hit by weak exports and investment and fallout from the Ukraine crisis, data showed on Thursday.

According to a flash estimate by the federal statistics office Destatis, Germany's gross domestic product (GDP) shrank by 0.2 percent in the period from April to June, following growth of 0.7 percent in the preceding three months.

Economy Minister Sigmar Gabriel blamed the development on "geopolitical risks in eastern Europe and in the Middle East."

"After a strong first quarter, GDP growth was weaker than most experts had expected," Gabriel said.

In addition to the crises in Ukraine and the Middle East, the economic contraction in Germany could also be attributed to a statistical effect, the minister pointed out.

Given the unusually mild winter, a lot of investment, particularly in the construction sector, had been "front-loaded" or brought forward to the first quarter, with the result that the upturn traditionally seen in the spring did not occur, Gabriel said.

"But in the first six months as a whole, economic output improved," he insisted. "Growth rates should be positive again in the remainder of the year."

Analysts had been forecasting zero growth or even a minimal contraction in the second quarter after the unusually mild winter boosted activity in the first three months of the year.

On the positive side of the GDP data, both private household and public sector spending increased, Destatis noted.

And as a result, most analysts insisted that the recovery trend was not in jeopardy.

- Temporary blip -

"The second-quarter setback reflects a combination of technical factors and external weakness, but not fundamental problems in the economy," said Berenberg Bank economist Christian Schulz.

"A relatively mild winter triggered a shallower than usual spring rebound in construction activity, while the timing of Easter holidays may have also shifted some production from the second quarter to the first quarter," he said.

"Put simply, the first-quarter figure probably overstated underlying growth a bit, while the second-quarter decline understates it."

In Berlin, economic think-tank DIW said that with weak industrial orders expected in the third quarter, "it is possible that the German economy could slip into a shallow recession."

"But as long as the crisis remains under control and the eurozone economy gradually recovers, the German economy should find its way back to a moderate recovery," said DIW economist Ferdinand Fichtner.

UniCredit economist Martina von Terzi agreed.

"The German economy remains in good shape fundamentally and stagnation will not become a lasting pattern for the German economy," she said.

Nevertheless, "looking ahead, recent leading indicators are not delivering a very promising message. Risks from Russia cannot be underestimated. Less dynamic growth for the third quarter and 2014 is likely."

Deutsche Bank economist Eric Heymann also believed that "despite the current geopolitical risks, we see no general change in the trend but rather a temporary dip."

The geopolitical risks such as the Ukraine crisis and the recently decided EU sanctions against Russia "are very obviously dampening business sentiment."

- Germany set for return to growth -

But "in the further course of 2014, industry in Germany is likely to return to a growth path, albeit with low momentum, Heymann said.

"The economic engine in German industry is sputtering, but it has not drowned yet," he said.

BayernLB economist Stefan Kipar was also confident that the German economy would see "moderate growth rates" in the rest of the year.

Commerzbank economist Joerg Kraemer said he has cut his forecast for 2014 from 2.0 percent to 1.7 percent.

"Although there is still some downside risk, growth will probably turn out higher in second-half, with Germany continuing its above-average performance," Kraemer concluded.

Analysts are concerned about underlying divergence between the performance of the German economy and of the French economy, the second-biggest in the eurozone.

Although France did slightly better in the second quarter, turning in zero growth, this was a flat performance for the second quarter running, reflecting deep and enduring structural problems in France, they say, in contrast to what looks like a blip in fundamentally robust Germany.

© 2014 AFP

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