German economy posts weakest growth in 5 years

BERLIN • The German economy grew by 1.5 per cent last year, the weakest rate in five years and markedly slower than the previous year, preliminary data showed yesterday, in a sign that exporters in Europe's largest economy are being hit by trade tensions.

German firms are struggling with a cooling of the global economy and tariff disputes triggered by US President Donald Trump. The risk that Britain will leave the European Union without a deal in March is another uncertainty.

The preliminary gross domestic product estimate published by the Federal Statistics Office was in line with market expectations, and compared with a growth rate of 2.2 per cent in 2017.

"The German economy thus grew the ninth year in a row, although growth has lost momentum," the office said, adding that growth was mainly driven by domestic demand with household consumption and state spending up on the year.

Company investments in machinery and equipment were particularly strong, rising by 4.5 per cent on the year. This helped offset a slowdown in export growth, which nearly halved to 2.4 per cent, from 4.6 per cent in 2017.

As imports grew at a faster pace than exports, net trade had a slightly negative effect on overall growth, the office said.

The head of the DIW economic institute, Dr Marcel Fratzscher, pointed to strong domestic activity and the record state budget surplus of nearly €60 billion (S$92.8 billion), which are both seen driving growth this year as well.

"The strong labour market with rising employment and healthy wage hikes will help to maintain private consumption as the main pillar of economic growth," he said. "The trade disputes and the uncertainty surrounding a recession in the US in the coming two years are probably the biggest risks for the economy."

German exports to China grew nearly 10 per cent year on year from January to November, while exports to Britain fell by 3.6 per cent in the same period, the office said.

"The overall impact of Brexit on German economic growth is impossible to quantify," an official of the statistics office told a news conference in Berlin.

The office said the economy probably grew slightly in the fourth quarter of last year, which would mean it escaped recession - defined as two or more consecutive quarters of negative growth.

There was also a slightly positive statistical overhang at the end of last year, suggesting the economy is carrying modest growth momentum into this year, the office said.

Policymakers and economists are racking their brains over how much the slowdown is caused by one-off factors, or if there are more fundamental, structural problems at play.

The statistics office pointed to domestic bottlenecks in new car registrations due to the introduction of stricter pollution standards, and a summer drought that caused disruptions to deliveries by river ferry of fuel and other raw materials.

But the economy's weak performance in the fourth quarter suggests that the contraction from July to September was more than just a blip and that Germany has reached peak growth.

Unexpectedly weak data from other European countries has pointed to a cooling in the euro zone economy as a whole, possibly making it harder for the European Central Bank to raise interest rates any time soon.

REUTERS

A version of this article appeared in the print edition of The Straits Times on January 16, 2019, with the headline 'German economy posts weakest growth in 5 years'. Print Edition | Subscribe