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Germany Nears Recession and Chinese Factories Slow in Trade War FalloutImageA Volkswagen production line in Wolfsburg, Germany. Automobiles, Germany’s biggest export product, have become collateral damage in the trade war between the United States and China.CreditCreditJohn Macdougall/Agence France-Presse — Getty Images
By Jack Ewing
Aug. 14, 2019
FRANKFURT — In ominous signs of the damage being done by the trade war between China and the United States, data released on Wednesday indicated that the German economy was hurtling toward recession and that growth at Chinese factories was slowing at a pace not seen in nearly two decades.
The numbers are among the most tangible consequences of President Trump’s tariffs on global trade for China as well as Germany, which sets the tone for Europe. Mr. Trump is succeeding in inflicting pain on countries he accuses of unfair trade practices, but economists warn that the pain is likely to boomerang onto the United States.
Germany’s economy shrank 0.1 percent from April through June, and it has been treading water for the past year, the government’s official statistics agency said. Deutsche Bank analysts predicted that the economy would continue to shrink in the current quarter, meeting the technical definition of a recession.
In China, factory output in July fell to its slowest pace in 17 years, according to government data. Although the Chinese economy posted trade figures that were stronger than expected last week, the industrial output figure was another sign that China’s overall growth rate continues to slow under the weight of the trade war and the country’s debt problems.
China and Germany both have large trade surpluses with the United States, but they are also important customers for American products. Germany bought goods and services worth $72 billion from the United States last year.
“If this continues it will eventually mean less demand for U.S. goods,” said Carsten Brzeski, chief economist at ING Germany.
Fear of possible blowback helped prompt a sell-off on Wall Street as well as on stock markets in Europe. The main stock indexes in Frankfurt and Paris closed down more than 2 percent.
In the United States, the S&P 500 was down roughly 2.5 percent at midday. Yields on United States government bonds also fell, a signal that investors were lowering their expectations for growth. Bond yields, which drop as prices rise, have been tumbling since a recent escalation of the conflict pushed investors seeking a safe haven toward government bonds.
It is not surprising that China and Germany are stumbling under the weight of the trade pressures. China is the world’s largest exporter of goods and services, just ahead of the United States. Germany is No. 3, and exports account for almost half of its gross domestic product. Both countries have been hit directly by Mr. Trump’s tariffs, and more broadly by the disruption to the global economy that the trade conflict has caused.
Germany is also under stress from Britain’s chaotic attempts to leave the European Union, while tensions in the Persian Gulf have unnerved company executives about sales prospects in that important region. As a result, they are reluctant to invest in new buildings or factory space in Germany.
United States tariffs have mostly been directed at China, but the Trump administration has also imposed levies on European steel and aluminum. Mr. Trump has often threatened to impose tariffs on German cars.
The data Wednesday suggested that the German auto industry was hurting plenty. Automobiles, Germany’s biggest export product, are a prime example of how the country has been caught in the trade crossfire between the United States and China.
The German carmakers Volkswagen, Daimler and BMW all earn at least a third of their revenue in China, where auto sales have been slipping after years of explosive growth. A major factor in the slide is the barrage of trade threats that have unsettled Chinese consumers, discouraging them from buying big-ticket goods.
China is just one of the problems facing German automakers, which dominate the luxury car market but are trying to cope with changing demands, including stricter emissions standards, a costly shift to electric cars and competitors like Tesla.
Because cars are Germany’s biggest export, problems in the industry reverberate through the economy. Moody’s Investors Service downgraded the debt of the steel maker ThyssenKrupp further into junk territory on Wednesday, citing in part slack demand from automakers.
Germany’s economic performance was the worst of any eurozone country during the second quarter, separate data from the European Union statistics agency indicated. Even Italy, the economic laughingstock of the eurozone, did slightly better than Germany — its growth in the quarter was zero.
That is a humbling experience for Germany, which has long lectured other countries on how to manage their economies and scolded them for having too much debt.
Germany was among the first European countries to bounce back from the debt crisis that struck the eurozone in 2010, and its unemployment rate, at 3.1 percent, is still the lowest in the zone.
Any schadenfreude elsewhere in Europe is likely to be short-lived. German automakers and other manufacturers buy many of their components from countries like Italy, the Netherlands or Poland. Germany accounts for more than a quarter of the European Union economy. It is virtually impossible for the region to thrive when Germany is ailing.
The slumping growth will probably increase calls for Chancellor Angela Merkel’s government to increase spending to stimulate the economy. That will be politically tricky. Germans pride themselves on fiscal prudence, and the government has recorded budget surpluses for the last five years.
Economists say the country should take advantage of record low interest rates to invest in infrastructure such as its aging rail network, in education and in research and development. German government 10-year bonds were commanding a yield of minus 0.65 percent Wednesday, meaning investors are effectively willing to pay Berlin to keep their money safe.
The decline in economic output and the weak outlook “increasingly add to the economic case for a dose of fiscal stimulus,” Oliver Rakau, chief German economist at Oxford Economics, said in a report Wednesday. But, he said, “the political costs of such a U-turn seem large absent more economic and political pain.”
Carlos Tejada contributed reporting from Tokyo.
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