Groß Trouble In Kleine China

Germany's economy shrank in the second quarter of 2019

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What's going on?

The writing was on the wall for Germany last week – and Wednesday’s data confirmed that the eurozone’s largest economy did indeed shrink in the second quarter of 2019.

What does this mean?

Most of the eurozone economy grew more slowly in the second quarter than the first, but it still eked out a 0.2% expansion. A beleaguered Italy didn’t manage to grow at all. And then there was Germany: its economy shrank 0.1% from the quarter before.

Economists had expected a decline, though, as Germany’s struggles this year were well telegraphed. Practically half its economy relies on demand from abroad – and with the global economy slowing, those sales suffered. It’s been a victim of the US-China trade war too: over 60% of the cars sold to China from the US are produced by German companies, and as Chinese demand fell in the wake of tariffs, those automakers struggled to stay on track.

Why should I care?

The bigger picture: It’s shrinking that binds them.
An estimated 35% of the eurozone’s economy depends on China’s – and as the biggest brick in the bloc, Germany is inextricably linked to the fortunes of the People’s Republic. Adding fuel to the fire was China’s revelation on Wednesday that its industrial output growth – which fell short of predictions – was its weakest for 17 years. And the country’s retail sales growth, which also missed forecasts, slowed down in July: weaker car sales were to blame, but new vehicle emissions regulations played a part too.

For markets: Will this be remembered as a cult classic?
The Chinese government has shown it’s willing to help boost its own economy. Germany’s… um… hasn’t. That might soon change, though. Some investors reckon the European Central Bank’s forthcoming interest rate cut won’t help the country’s growth enough – and that Germany’s central bank will need to chime in with its own support if it wants to keep the country from sliding into recession.

Originally posted as part of the Finimize daily email.

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