China-US trade war pulls German economy into recession

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The largest economy in the European Union is experiencing serious problems as China and the United States introduce new duties on mutual trade, and Brexit can bring a new batch of problems for Germany under the accelerated scenario. Expectations of a recession in the German economy intensified after German GDP declined 0.1% in the second quarter. If the decline is recorded in the third quarter ending on September 30, the fact of the recession will be recognized by formal indicators. So far, the sharp slowdown in the German economy is mainly due to external factors – the German domestic market is holding quite confidently. However, it is difficult to count on a quick recovery in world trade, and the problems of the German economy are already beginning to exert influence on other countries of the European Union.

According to the September forecast of the German Institute for Macroeconomics and Market Research (IMK), the country’s economy is in a state of “acute threat of recession” – its probability is estimated at 59.4%, although in August this figure was 43%. The Ifo Institute for Economic Research in Munich predicts a 0.1% decline in German GDP in the third quarter, while the Kiel Institute of Economics expects an even larger drop of 0.3%.

The OECD forecast was also published in mid-September, according to which German GDP will grow by only 0.5% this year, and growth by 0.6% is expected next year. This is significantly worse than the expected growth in the eurozone as a whole (1.1% and 1%, respectively) and compared with the previous forecast. The OECD’s previous forecast estimated Germany’s economy to grow by 0.7% in 2019 and 1.2% in 2020.

The main pressure on the export-oriented German economy is creating a reduction in world trade, primarily due to the trade war between China and the United States. Signs of problems were noticeable last year, when the volume of new export orders for German enterprises began to decline, falling to the level of the end of 2016. At the same time, the dynamics of German industry began to slow down, especially in industries such as engineering, pharmaceuticals and the chemical industry. In July, when the industrial production index decreased by 0.6%, a number of executives of the largest German auto parts manufacturing companies reported that realities turned out to be worse than their pessimistic scenarios. The reduction in orders from automakers hit the business of the world’s largest chemical concern BASF,

“Weakness in industry spreads like an oil slick to other sectors of the economy. The weakness of the situation is already affecting the labor market: unemployment in Germany has been recorded for the fourth consecutive month, ” Timo Wolmershuiser, an Ifo Institute expert, quotes the German news agency Deutche Welle . Not only economists expect a recession: according to an August assessment by Ifo, the German business sentiment index fell for the fifth consecutive time, dropping to a minimum since November 2012.

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China became Germany’s main trading partner in 2016, displacing the United States, which immediately moved to third place after France. Donald Trump Protectionist Policies Contribute to US Reduction, which was dissatisfied with the almost twofold lag in US imports to Germany from German exports to the United States (for 2015, respectively, 60.7 billion and 113.2 billion euros). On the contrary, in the case of China, the Germans were faced with the task of reducing the mutual trade deficit, which in 2015 amounted to 20.6 billion euros. Over the past three years, due to the growth of German exports to China, this imbalance has noticeably decreased: last year, the volume of Chinese imports to Germany amounted to 106.2 billion euros, the export of German goods to China reached 93.1 billion euros, including due to the German auto industry. Exactly a year ago, under the influence of the trade war, Germany became a leader in the export of cars to the Chinese market. In general, China last year retained first place in total trade with Germany, ahead of the Netherlands (189.4 billion euros) and the United States (178 billion euros).

But already in February of this year, Germany faced a fall in foreign trade – exports fell by 1.3% compared to the same month of 2018, and imports fell by 1.6%. According to data as of mid-August, German exports fell already by 5.1% compared to the same period of the previous year (to $ 632.9 billion), and industrial production was also declining at the same pace. “The weakening of world trade, the global struggle in the automotive industry, Brexit and China’s economic problems are bringing a perfect storm for Germany,” said Keith Jax , strategy expert at French bank Societe Generale, for CNN in August .

In early September, German Chancellor Angela Merkel made a two-day official visit to Beijing , who had to take a very difficult line in negotiations with the PRC leadership. On the one hand, Hong Kong protest activists counted on Merkel’s support, sending a letter to the German chancellor reminding them of an international campaign to support civil rights activists in the GDR three decades ago. On the other hand, representatives of German business announced problems with the bureaucracy in doing business in China. During negotiations with Premier of the State Council of China Li KeqiangMerkel said that in order to resolve the situation in Hong Kong, the parties need to refrain from violence, while urging “not to impede the development process of China.” In addition, the German chancellor expressed the hope that an agreement on the protection of investment between China and the European Union will be concluded in the near future.

As for the economic relations between Germany and the USA, here one of the most negative expected scenarios is the introduction of 25 percent duties on the import of German cars and auto parts into America. Donald Trump announced the relevant plans in February, but they were postponed for six months after the European Commission announced a response in the form of duties on US exports in the amount of 20 billion euros. This timeout expires in mid-October.

Another serious risk for the German and European automobile industry as a whole is Brexit. A few days ago, the European Automobile Manufacturers Association (EAMA) issued a statement signed by 23 automakers, which said that in the event of a tough scenario for Britain to exit the European Union, the automobile industry would face a “genuine earthquake”. The possible restoration of customs barriers will lead to huge costs for automakers, and Germany will be among the most affected, given its significant investment in the British auto industry (for example, companies such as Bentley, Rolls-Royce, Mini).

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