Connect with us

Germany’s economic resilience is crumbling, fueling fears of a recession and increasing pressure on the government to deliver a fiscal stimulus package.

Economic data released Wednesday revealed that the German economy shrank by 0.1% in the second quarter of 2019, having grown by 0.4% in the first quarter. Manufacturers and the construction sector bore the brunt of a global slowdown amplified domestically by trade conflicts and Brexit uncertainty.

The shrinkage in GDP (gross domestic product) growth marks the end of a decade of expansion for the German economy, which has grown by an average of 0.5% quarter-on-quarter every quarter since the end of the 2008/9 recession, expanding in 35 of the last 40 quarters.

However, since the third quarter of 2018, the economy has been in de facto stagnation, with quarterly GDP growth averaging 0%.

Resistance is crumbling

In a note on Wednesday, ING Chief German Economist Carsten Brzeski said that while the industry slowdown is not particularly new, recent developments indicate that “the resilience of the domestic economy to external shocks is crumbling.”

“Profit warnings, first lay-offs, an increase in short-time work schemes, falling consumer confidence and weaker activity in the service sector have sounded the alarm bells,” Brzeski said.

Trade conflicts, Brexit uncertainty and global geopolitical crises, along with an ailing automotive sector, have all taken their toll. The German economy ministry said in its monthly report on Wednesday that the outlook “remains subdued for the time being.”

“Trade conflicts have recently worsened and the prospects for an orderly Brexit have not improved,” the report added.

Brzeski suggested that the weakening of the domestic economy is the most worrisome trend facing Germany, rather than wider economic stagnation.

Barclays vice president of macro research, Iaroslav Shelepko, also said that Wednesday’s GDP print confirmed the vulnerability of the German economy to external demand slowdown, amid heightened uncertainty over trade.

German industrial output posted a quarterly decline of 1.9%, its steepest quarter-on-quarter fall since the last technical recession observed amid the euro area debt crisis in 2012/13. However, Shelepko suggested that domestic demand has thus far demonstrated “remarkable resilience” due to the services sector offsetting much of Germany’s trade-related industrial weakness.

“Looking into Q3, the labor market will be key to watch for any emerging cracks amid the ongoing industrial recession,” Shelepko said.

“Disposable income growth and private consumption resilience might be at risk should the downturn in the industrial sector spread into services.”

Combined with continued external challenges, such as persistent trade-related weakness in global demand and elevated geopolitical uncertainty, Barclays expects the German economy to post another mild decline in the third quarter of 2019, therefore entering a technical recession even before Brexit and the risks to U.S.-EU trade are due to crystallize.

Time for stimulus

Brzeski said Germany needs a “two-pillar stimulus package” comprising a short-term stimulus and an increase in the “long-run growth potential.”

This stimulus will have to go beyond state measures such as “bank bailouts, scrapping and short-time working” which were successful in 2008/9 because the economy was fundamentally sound, and must instead address structural problems.

“The buzzwords are well-known: digitization, climate protection, energy transition, infrastructure and education,” Brzeski added.

He highlighted growing support to agree on climate change measures in September, to increase investment in digitization, and to reduce the so-called solidarity tax as indicators of long-term reform.

The solidarity tax, a government-imposed tax levied in a bid to fund theoretically unifying projects, was introduced at a flat rate of 7.5% on all personal income after the reunion of East and West Germany in 1991.

Brzeski also suggested that there is ample fiscal room for maneuver.

“The government’s interest payments have dropped from 2.7% of GDP in 2008 to some 0.8% of GDP this year,” he said.

“The government could run fiscal deficits of some 1.5% of GDP and the debt-to-GDP ratio would still stabilize at 60%.”

While running deficits instead of surpluses is currently “still more than one bridge too far” for the German government, some fiscal loosening looks “more likely than many might think,” he concluded. Without this, the outlook for the German economy will be beholden to external factors.

Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

World

UK tech startups see record foreign funding thanks to Amazon, SoftBank

Published

on

London’s Old Street roundabout, often dubbed “Silicon Roundabout.”

Chris Ratcliffe | Bloomberg | Getty Images

British technology start-ups have attracted more foreign investment since the start of the year than they did throughout all of 2018, according to fresh figures published Wednesday.

U.S. and Asian venture capital investors poured $3.7 billion into U.K. tech companies in the first seven months of 2019, research from industry group Tech Nation and data firm Dealroom showed. Last year, U.K. start-ups raised $2.9 billion from American and Asian investors.

The eye-watering sum was boosted by nine-figure deals from capital-rich companies like Amazon and SoftBank. In May, Amazon led a $575 million funding round for Deliveroo — although that was hit with a warning from the U.K. competition regulator — while SoftBank’s notable U.K. investments include $800 million for Greensill and $390 million for OakNorth.

Including domestic sources of cash, $6.7 billion has been invested into private British tech firms overall in 2019, Tech Nation said, adding that figure could rise to a record $11 billion by the end of the year. The organization said U.S. corporate venture capital funding for U.K. start-ups has risen by 3% in the last six years, while Asian corporate funding is up 20%.

“It’s evidence for us that there’s growing interest for emerging technologies that are gaining a lot of traction in the U.K. from foreign investors,” George Windsor, Tech Nation’s head of insights, told CNBC in a phone interview. “This shows us the U.K. is continuing to perform strongly on the global stage, and for us this is just the start.”

The U.K. pulled in the largest amount of foreign funding for tech companies versus other European countries, the data showed. For example, German start-ups bagged about $800 million from U.S. and Asian investors in the first half of the year, while French firms brought in only $500 million.

One particular bright spot for the U.K.’s tech industry has been financial technology, with plenty of capital flowing into start-ups like Monzo, Checkout and GoCardless. Monzo is backed by U.S. payments firm Stripe, while GoCardless counts tech giants Alphabet and Salesforce as investors.

But Tech Nation’s Windsor said the country has managed to maintain a diverse mix of start-ups in terms of sectors, with the research highlighting health tech firm Babylon and energy supplier Ovo Energy as examples of other companies attracting large sums of money. British artificial intelligence and cybersecurity firms are also an attractive bet for foreign investors, he said.

And while Brexit has been a source of uncertainty for businesses across the U.K., Windsor said it isn’t at the top of tech entrepreneurs’ minds: “Entrepreneurs had problems before Brexit, and they’ll just get about solving them. Brexit is too nebulous a thing for them to tackle as an entrepreneur.”

Source link

Continue Reading

World

Trump renews call for Russia to join G-7 group

Published

on

US President Donald Trump meets Russian President Vladimir Putin on the first day of the G20 summit in Osaka, Japan on June 28, 2019.

Anadolu Agency | Anadolu Agency | Getty Images

WASHINGTON — President Donald Trump renewed calls Tuesday to readmit Russia to the G-7 ahead of the global group of industrialized nations’ summit in Biarritz, France, this weekend.

The group once known as the G-8 included the U.S., Canada, the U.K., France, Italy, Germany, Japan and Russia — but was cut down to the G-7 in 2014 following Russia’s illegal annexation of Crimea.

“I’ve gone to numerous G-7 meetings, and I guess President Obama, because Putin outsmarted him, President Obama thought it wasn’t a good thing to have Russia in so he wanted Russia out. I think it’s much more appropriate to have Russia in and it should be the G-8,” Trump said, referencing the U.S.-led role in suspending Russia’s involvement with the group.

“So I could certainly see it being the G-8 again,” Trump added, noting that the group frequently discusses issues concerning Russia.

Russia’s annexation of Crimea from Ukraine sparked international uproar and triggered a series of sanctions to be placed on Moscow. Shortly after the annexation, a war broke out in eastern Ukraine between government forces and Russian-backed separatists.

The G-8 will be hosted by French President Emmanuel Macron in Biarritz, France, Aug. 24-26. The group meets annually to discuss issues from world energy policy to international security.

Trump previously said Russia should be reinstated to the group as he departed for last year’s summit, held in Canada.

“Russia should be in this meeting,” Trump told reporters before boarding Marine One for the summit. “They should let Russia come back in, because we should have Russia at the negotiating table.”

Source link

Continue Reading

World

‘All we have to do is tax their cars’

Published

on

President Donald Trump answers questions from reporters as he meets with Romania’s President Klaus Iohannis in the Oval Office of the White House in Washington, August 20, 2019.

Kevin Lamarque | Reuters

President Donald Trump believes he has quite the bargaining chip with the European Union.

“Dealing with the European Union is very difficult; they drive a high bargain,” Trump told reporters at the White House on Tuesday. “We have all the cards in this country because all we have to do is tax their cars and they’d give us anything we wanted because they send millions of Mercedes over. They send millions of BMWs over.”

The threat came after Trump signed a deal with the EU earlier this month to boost U.S. beef exports, which partially relieved American farmers who have taken a big hit from the intensified trade war with China. Annual duty-free U.S. beef exports to the EU are expected to nearly triple to $420 million as a result of the deal.

The president had vowed to impose tariffs on imported vehicles and parts from the EU and Japan earlier this year but he decided to delay the duty for 180 days in mid-May.

Trump is set to meet leaders from the EU at the G-7 summit this weekend in France. Many expect the summit to end without a joint communique due to differences on trade.

Source link

Continue Reading

Trending