'Clouds Gathering' On Germany's Economic Outlook - What Happens To The EU?

What Happens To Europe When Germany's Economy Slows?

Authored by Claudio Grass via The Mises Institute,

Until recently, Germany has been the seemingly unbreakable workhorse that has pulled the European economy back from the brink and kept it ticking along through a myriad of internal and external pressures, as well as political crises, over the last decade. As the undeniable leader of the bloc, the country has spearheaded and supported rescue plans for the Eurozone’s weaker links, as well as a number of controversial policies that work towards further centralization within the EU. 

However, with clouds now gathering over Germany’s economic outlook, concerns over potential knock-on effects on the entire monetary union are on the rise.

Falling Below Expectations

Trade tensions, the threat of a hard Brexit and weaker emerging markets growth have all played a part in dampening Germany’s nine-year-long economic upswing. 2018 was a trying year for the world’s third-largest exporter, as Germany saw its much-celebrated trade surplus shrink. With imports growing faster than exports, the impact of the trade disputes between the US and both China and the European Union has been widely felt by industry leaders.

Recently released figures also cast large shadows over Germany’s formidable manufacturing sector, with industrial output much lower than expected. In November, industrial output fell by 1.9%, while the year-on-year decline was 4.7%. These figures, the worst since the end of the 2008 crisis, are understandably giving rise to fears among investors and analysts of a nearing recession.

Furthermore, the new year is unlikely to bring a reversal of fortunes for the German economy, as it is now forecast to expand at a rate below 1.5%, an estimate downwardly revised since March. At the same time, the sentiment on the ground by industry leaders and investors is shifting from caution and hesitation to outright pessimism for what lies ahead. According to a recent survey by the BVMW industry association, 53% of small and medium-sized companies in Germany believe that the country will slip into a recession in the next year.

Domino Effect

Germany’s role as the locomotive and economic leader of the entire bloc has been crucial for the last decade and the timing couldn’t have been worse for the cracks to start showing in Europe’s largest economy. The Eurozone as a whole is already facing strong headwinds, with growth estimates dropping to new lows. According to a recent survey of economists by Consensus Economics, GDP growth for 2019 is projected just below 1.6%, or 0.4% lower than the previous, more optimistic forecast in March. That would be the second consecutive annual decline, with the growth figures for 2018 expected to come in at 1.9%, far below the robust 2.4% recorded in 2017.

Overall, it would appear that Germany acts as the string that keeps the bloc together and should it break, multiple challenges could surface, threatening the future of the Eurozone and the cohesion of the EU. As a result of the growing political frictions and the projected economic slowdown, the outlook for European markets and for the Euro is far from encouraging.