Achtung Baby

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What's going on?

The German economy is shrinking. Official data showed a 0.2% decline last quarter compared to the previous one – the first contraction since 2015. Investors suspected bad news was coming, but they didn’t think it would be quite this lousy…

What does this mean?

The decrease is a bad sign for Europe’s biggest economy. German growth has been slowing throughout the year, but a contraction is particularly grim news – since it’s only the fifth time the German economy has shrunk since the financial crisis.

Much of the decline comes from Germany’s all-important car industry: companies like Volkswagen and BMW have struggled to meet new emission standards, delaying production. At the same time, a massive drought affecting the Rhine river hurt other firms, which were unable to bring raw materials in and ship finished products out. These are (hopefully) one-off factors, but investors are also pessimistic about the future. Germany has to confront some difficult longer-term trends, including reduced household spending and declining car demand from China.

Why should I care?

For markets: Car crash ahead?

The news is a warning that Germany has more to worry about than just Fußball. Although things will probably get better, they could also get worse. The European Central Bank wants to raise interest rates next year, a move which typically reduces growth by making borrowing more expensive. With growth already stalling, a rate hike could push the German – and European – economy in the wrong direction. Germany’s central bank warned on Wednesday that their financial system isn’t prepared to deal with a recession – and higher rates without higher German growth could bring about just that.

The bigger picture: Dark days in Europe.

Germany is supposed to be the economic powerhouse among countries using the euro, and this stuttering growth won’t help an already struggling continent (growth across the eurozone was just 0.2% last quarter). Disputes with Italy and trade tensions with the US are making matters worse. You wouldn’t blame Chancellor Merkel for eloping!

Originally posted as part of the Finimize daily email.

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