Germany’s economy shrinks, fuelling risks of a recession and fears of economic contagion throughout Europe. Unfortunately, central banks have limited resources to reduce the effects of broad-based economic decline.
Failures of the ‘New Normal’
Over the last ten years, economic stagnation has prevailed across Europe. A ‘new normal’ as characterized by low-interest rates and easy monetary policy has done little to spur inflation and stimulate growth. Analysts now fear that if central banks fail to act, the region could face another lost decade.
Markets were jarred again today when investors learned the German economy contracted during the second quarter. GDP figures shrank by -0.1% for the period, down from the +0.4% growth figure posted during the first quarter. Nadia Gharbi of Pictet Asset Management tweeted:
This puts Germany at risk of falling into a recession, which is defined by two consecutive quarters of GDP contraction.
Germany Contagion Risks Build
Trade war tensions and global uncertainties have weighed on the country’s manufacturing sector and analysts now fear economic weakness in Germany could cause an economic contagion throughout the eurozone. Economist Juan Jose Gil recently told Bloomberg:
Germany is Europe’s locomotive. If Germany catches a cold, other countries get sick.
These fears have been confirmed in the broader GDP data reports, which show that the eurozone economy barely grew during the second quarter of 2019. As Kit Juckes of Societe Generale recently told CNN:
Weaker global trade, a struggling global auto industry, Brexit and China’s economic problems get pretty close to a perfect storm for Germany.
Germany is Europe’s largest economy (and the fourth largest in the world),