Germany’s economy contracted in the third quarter of 2018, and has been struggling to find its feet ever since.
Yesterday, the government in Europe’s largest economy cut its forecast for 2019 growth in half, to just 0.5%. That would be the slowest annual growth rate since 2013, when the euro zone was trying to pull itself out of a sovereign debt crisis. Last year, German GDP rose by 1.4%.
Despite relatively strong domestic demand, helped by high employment, there’s a number of external factors weighing on Germany’s economy. As a major exporter, Germany has been hit by the trade slowdown triggered by the US’s protectionist policy, especially towards China. Germany’s manufacturing industry is in a deep slump, with extra pressure put on the auto industry by a change in emissions standards. That coincides with a global economic slowdown that’s going to hit 70% of the world this year, according to the IMF.
More bad news came out today. The purchasing managers’ index for manufacturing, which measures activity in factories, was 44.5 in April, the fourth consecutive month below 50, which signals a contraction. Manufacturing saw a “further steep decline” in new export orders, said IHS Markit, which runs the survey. While the services sector continued to expand, manufacturing is what drives Germany’s economic growth, or in this case, its deceleration.
Analysts at Barclays warn that Donald Trump’s “America First” trade policy is a risk for Europe. The US president recently said he was considering imposing tariffs on $11 billion of EU goods, to which the EU retaliated with its own list. Trump has also repeatedly threaten to impose car tariffs on the EU, which would hit the German economy hard. “The following weeks remain key for the growth outlook, with the focus on the outcome of the US’s pledge to impose tariffs on auto imports from the EU on national security grounds,” the Barclays analysts wrote in a note to clients.
An economic slowdown isn’t just contained to Germany. Italy’s economy is faring even worse, forecast to only grow just 0.2% this year after slipping into a recession at the end of last year. The euro zone’s purchasing managers’ index for the service sector, which Commerzbank calls the “most reliable economic barometer” for the region, unexpectedly fell in April. The German bank forecasts this stretch of weak continent-wide growth to last until the middle of the year.