Trump’s Trade War Causes No Growth In Germany’s Economy In Q2

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A Volkswagen badge on a production line at the Volkswagen plant in Wolfsburg, Germany (Photo: Reuters)

Germany's already moribund economy is expected to post negative growth in the second quarter mainly on account of Trump's trade war with China. The certainty of this no growth scenario will also snap Germany's nine-year-long streaks of consecutive quarterly growth.

In consonance with this spate of dismaying news are confirmed reports German business morale fell to its lowest level since November 2014 in June, according to the Ifo Institute for Economic Research based in Munich.

Ifo is Germany's most influential economics research institute and is widely known for its monthly Ifo Business Climate Index for Germany.

It's business climate index for June fell for the third month in a row to 97.4 in June from 97.9 in May. That was below a consensus forecast for 97.2.

"The German economy is heading for the doldrums," said Ifo President Clemens Fuest.

He noted Germany's business climate in both the manufacturing and services sectors has worsened.

The Bundesbank, Germany's central bank, said expects the economy to contract slightly in the second quarter after growing just 0.4% from January and March. The federal government has halved its 2019 growth forecast to 0.5% after a GDP growth of 1.5% in 2018, the weakest rate of expansion in five years.

Ifo economist Klaus Wohlrabe said Trump's trade against China remains the main source of uncertainty for German businesses, which rely on exports to both mammoth countries for their continued growth. Wohlrabe doesn't see a recession but does see a slowdown. Other economic analysts agree.

In a note to investors, Christina Iacovides of Capital Economics said she expects the German economy to slow to little more than a crawl in the second quarter.

Another analyst, Carsten Brzeski of ING, said "fear of losing" is the best summary of the current state of Germany's businesses. Brzeski expects the services sector to continue driving growth in the broader economy.

Some economists now fear the recession in the manufacturing sector could spread to the services sector, which has been responsible for most of Germany's growth in these turbulent times.

"A bottoming-out is in sight for German industry," said Brzeski. "The recent U-turn of the ECB towards more dovishness indicates that financing conditions for new domestic investments will remain favorable. However, let's be clear, a bottoming out is still far from being a strong rebound."

Instead of manufacturing, Germany's economy now relies on private consumption for growth, according to some analysts. This turn of events, however, will render the economy more vulnerable to rising wages and low-interest rates.

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