Skip to main content

Advertisement

Advertisement

German contraction fuels eurozone fears

FRANKFURT — Cracks are emerging in Germany’s once rock-solid economy as companies’ reluctance to invest bears out European Central Bank president Mario Draghi’s warning that the euro-area recovery is in danger.

Construction in Germany declined 4.2 per cent in the second quarter. Photo: Reuters

Construction in Germany declined 4.2 per cent in the second quarter. Photo: Reuters

FRANKFURT — Cracks are emerging in Germany’s once rock-solid economy as companies’ reluctance to invest bears out European Central Bank president Mario Draghi’s warning that the euro-area recovery is in danger.

Gross domestic product in Europe’s largest economy shrank 0.2 per cent in the second quarter, the Federal Statistics Office said, confirming an Aug 14 estimate.

The disappointing performance of an economy once considered the last bastion of growth in a sickly eurozone echoed the region’s second and third largest economies, France and Italy, which respectively stagnated and fell back into recession over the same period.

The weakness of a German economy that has outperformed its peers since the regional debt crisis comes as Mr Draghi ponders adding more stimulus to fight the threat of deflation in the currency bloc.

He signalled that declining inflation expectations could tip the ECB into broad-based asset purchases, an option officials may discuss at this week’s policy-setting meeting.

“A weaker German economy weighs on Europe,” said Ms Michala Marcussen, global head of economics at Societe Generale in London. “The euro area is falling into a lowflation trap with annual growth and inflation rates stuck between zero and 1 per cent. The ECB probably won’t act this time, but I expect Draghi to reiterate his Jackson-Hole message.”

Policy makers will use “all the available instruments needed to ensure price stability” and are “ready to adjust the policy stance further”, Mr Draghi said on Aug 22 in the Wyoming mountain retreat that hosts the Federal Reserve Bank of Kansas City’s annual economic symposium. The ECB’s Governing Council will set monetary policy on Sept 4 in Frankfurt.

Capital investment slumped 2.3 per cent in the second quarter, with construction declining 4.2 per cent, the statistics office said. Private and government consumption each rose 0.1 per cent. Exports climbed 0.9 per cent and imports were up 1.6 per cent.

Investment was the biggest drag on the economy, subtracting 0.5 percentage point from GDP. Net trade cut 0.2 percentage point, while inventories added 0.4 percentage point.

Germany’s finance ministry has partly blamed the second-quarter contraction on the Ukraine crisis and sanctions against Russia.

Economy Minister Sigmar Gabriel has said GDP will probably increase in the remainder of 2014.

But some economists expect the second-quarter weakness to carry through into the third quarter, with the Ifo institute estimating growth will be “close to zero” in the third quarter while the DIW institute has warned of the danger of recession. Agencies

Read more of the latest in

Advertisement

Advertisement

Stay in the know. Anytime. Anywhere.

Subscribe to get daily news updates, insights and must reads delivered straight to your inbox.

By clicking subscribe, I agree for my personal data to be used to send me TODAY newsletters, promotional offers and for research and analysis.