Whether German growth rebounds or declines further hinges crucially on developments on the trade front.
Nadia Gharbi, Europe Economist
The German economy has slowed sharply over the last two years, from real GDP growth of 2.8% in 2017 and 1.5% in 2018 to an estimated 0.6% in 2019. Skewed towards the industrial tradable sector, the German economy has been hit harder than others by the challenging external environment.
The combination of the US-Chinese trade conflict, a global slowdown, low global capex spending, geopolitical uncertainties, the latent risk of US import tariffs on cars and the uncertainty surrounding Brexit, in addition to the auto sector’s own structural issues, are all factors that have dampened manufacturing sentiment and activity throughout 2019, leading to an industrial recession in Germany.
While the manufacturing sector, accounting for 25% of total value added, has been the main source of concern, the more domestically oriented services and construction sectors have remained robust, preventing the economy from slipping into a more severe downturn.
The main pillars of German domestic growth should remain resilient next year. Household spending and construction are expected to remain the main growth drivers. However,
The big unknowns remain exports and manufacturing. Leading indicators suggest that the worst of the downturn is behind us, while external demand seems gradually to be gaining some traction. This should lead to a slow recovery in exports and curb the downturn in manufacturing. That said, there remain a lot of downside risks. A further escalation in trade tensions would keep manufacturing in recession, with a larger spill over into the labour market and domestic sectors. The threat of US tariffs on European car imports is a sword of Damocles hanging over the German auto industry.
We expect German GDP to expand by around 0.7% in 2020. While there has been much speculation about German fiscal policy, our view remains unchanged. We would probably need to see substantial deterioration in the economy before Berlin is tempted to launch a major fiscal package. The trigger for stimulus could be a clear rise in unemployment. An external shock or political developments within the governing coalition could also push towards more fiscal spending.