Germany was bracing Thursday to find out if it slipped into recession in the third quarter as trade tensions take their toll on Europe’s largest economy, fuelling calls for the government to relax its strict budget discipline.
Analysts surveyed by FactSet expect a 0.1 percent contraction of gross domestic product (GDP).
Coming after a shrinkage of 0.1 percent in the second quarter, this would mean that Germany is technically in recession for the first time in nine years.
The main growth engine of the German economy — the country’s industrial might — is stuttering.
In September, industrial production shrank 0.6 percent month-on-month, with manufacturers hit by a sharp 1.3 percent drop.
German industry, which is mainly oriented towards exports, has suffered months of headwinds from the US-China trade war, President Donald Trump’s threat of US duties on European car imports and Brexit uncertainty.
The German government is expecting just 0.5 percent growth this year and last month revised down its projections for 2020 to a 1.0 percent expansion, compared with previous forecasts of 1.5 percent.
– Zero deficit? –
Fears of a recession have revived a debate in Germany about whether the government should stick to a self-imposed rule to keep the budget balanced — a dogma known as the “black zero”.
The zero deficit rule is not legally binding — unlike the “debt brake” which allows for a federal budget deficit of up to 0.35 percent of GDP.
A group of expert economists known as the “Wise Men” earlier this month advised German Chancellor Angela Merkel’s government to loosen this tough no-new-debt policy “in case of a broad, deep recession”.
Sticking to the so-called “black zero” target during a deep downturn “could block the effects of the automatic stabilisers” that kick in when economic activity slows, said the advisory council.
But they concluded that Germany was not yet in a situation where relaxing the policy would be justified.
The Federation of German Industry said the report was “a wake-up-call to politicians to boost growth”.
Merkel has so far ignored the growing calls.
Addressing the economic experts, she said: “You say clearly that a balanced budget and plenty of investment are important, if I understand rightly”.
During the G7 summit in August, Merkel said Germany “cannot live sustainably beyond our means” and must be able to finance state pensions for an ageing population.
– Eurozone ‘imbalances’ –
But Germany’s European partners and international financial institutions are joining in the calls for Berlin to do more to boost its economy.
French President Emmanuel Macron last week called on Germany to “re-pivot” its budgetary policy to boost European growth.
The European Central Bank’s new president Christine Lagarde on October 30 also sent a strong message.
She said that “countries with chronic budget surpluses like the Netherlands and Germany” need to increase spending to redress “imbalances” in the eurozone.
But even easing budgetary policy may not be enough.
A report by Berenberg bank in September said lengthy bureaucracy, under-staffed local governments and slow legal procedures meant that a rapid mobilisation of financial resources would be “difficult”.
Domestic consumption could come to the rescue.
The “Wise Men” in their report argued that higher salaries and favourable loan conditions in recent years were helping to boost demand.
They argued this in turn could “stimulate growth” in the future through more investment in construction and higher household consumption.