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Germany narrowly dodged its first recession in six years, putting a damper on speculation that the government will add fiscal stimulus any time soon.
The surprise expansion doesn’t change the fact that the economy is going through a torrid period that’s turned it from the euro area’s traditional growth engine into a source of weakness. A pile up of trade tensions, weaker global demand and turmoil in the automobile sector has led to the worst manufacturing slump in a decade and put question marks over the country’s role as an economic powerhouse.
The 0.1% increase in gross domestic product was led by consumer and government spending. Construction and exports also rose, while investment in machinery and equipment fell. The contraction in the second quarter -- which had sparked months of recession speculation -- was revised to 0.2% from 0.1%.
The euro rose after the report and traded little changed at $1.1001 at 8:18 a.m. Frankfurt time.
“I would put mild positive as a descriptor on the German GDP report,” said Jim McDonald, chief investment strategist at Northern Trust (NASDAQ:NTRS) Bank. “German is the point of the spear when it comes to manufacturing and especially exposure to China,” but “but consumer spending across all of Europe has been holding up better.”
There have been some signs recently that the economy may be through the worst of its downturn. Business sentiment appears to have stabilized, and investor confidence about the outlook is improving. But it’s far from an all-clear, with most key indicators still at multi-year lows and the economy expected to post sub 1% growth in 2019 and 2020.
The global economy also remains under pressure. Separate data Thursday showed Chinese growth spluttering, with factory output slowing, investment growth at a record low and consumption coming off the boil. In Japan, expansion cooled sharply in the third quarter.
The pain has been felt across the major names in German corporate royalty, with firms from Siemens to BASF repeatedly warning that trade fights are hitting sentiment and investment.
Upheaval in the car industry from emissions and the switch to electric engines have compounded the slump, and there’s little end in sight. Parts maker Continental AG (DE:CONG) said two days ago it sees no material improvement in global car production in the next five years.
What Bloomberg’s Economists Say
“The question remains how much of the weakness in manufacturing will spread to services. Our base case is that some of the damage will be transmitted, keeping growth slow, but that a downturn will be avoided.”
--Jamie Rush. Read the GERMANY REACT
Economic concerns weighed on bond yields, and German 10-year borrowing costs have been below zero for six months. It also meant Germany faced a growing chorus of calls to unleash fiscal stimulus. Among those voices was the European Central Bank, which loosened monetary policy in September to help the euro area and upped its push for public spending.
The German government’s response was that it would act if there was a crisis, and that wasn’t the case now. Finance Minister Olaf Scholz has said the country is in a “stable economic situation,” and he’s likely to feel vindicated by Thursday’s figures.
Economy Minister Peter Altmaier, speaking on ARD television shortly after the data were published, said characterized growth as “still too weak.”
“That means the upward trend has started but it’s proceeding very slowly,” he said.
Much hinges on developments in the U.S.-China trade battles that have dominated the global economic landscape. The danger of U.S. levies on European automobiles isn’t fully off the table, suggesting manufacturing momentum will remain subdued.
Consumers have also become wary. Households’ assessment of the growth outlook is at a seven-year low, financial expectations are deteriorating rapidly and fears of unemployment are rising.
“In a trade war, tariffs are only part of the problem,” Bloomberg economists David Powell and Dan Hanson wrote. “Uncertainty -- damping consumers’ appetite to buy and businesses’ incentives to invest -- can create a bigger drag on growth.”
(Updates with euro reaction in fourth paragraph, economist and government comments throughout.)