Germans feel the heat but some growth still expected

Concerns are growing over the strength of Europe’s largest economy after Germany warned it faced “considerable” risks linked to the eurozone crisis.

In a statement released yesterday ahead of next week’s second-quarter GDP figures, the country’s economy ministry said: “Economic dynamism in Germany is showing signs of weakening, particularly due to uncertainties brought about by the euro crisis.”

However, the ministry said that output is still expected to have grown in the second quarter, albeit moderately, following a strong start to the year.

European Central Bank president Mario Draghi has pledged to do “whatever it takes” to save the euro, and last week said the central bank would gear up to buy government bonds on the open market, but only if troubled countries ask for help.

It is unclear when Spain, which is facing painfully high borrowing costs, will seek such help. In addition, the eurozone’s permanent bailout fund, the European Stability Mechanism, still needs a green light from the German Constitutional Court, which rules on 12 September.

Germany is known for its export-driven growth, but the euro crisis saw exports fall 1.5 per cent in June, following growth of 4.2 per cent the previous month. Roughly 40 per cent of the country’s exports go to its partners in the single currency zone. Tuesday’s GDP figures are expected to show modest growth of about 0.2 per cent, but economists believe the danger of recession in the second half of the year is growing.

Jörg Krämer, chief economist at Commerzbank, said: “The German economy is losing momentum – there’s no doubt about that – and in the third quarter the economy will shrink compared to the second quarter.

“Things will go downhill from here. The German economy is not faring as badly as the rest of the eurozone but it can’t disconnect itself, especially as growth in China has slowed and continues to do so.”
China, which accounts for around 7 per cent of Germany’s total exports, is under pressure from shrinking global demand. Growth in the world’s second largest economy slowed to a three-year low of 7.6 per cent in the three months to June.

A recent survey, however, showed 63 per cent of Germans think the country is coping well.

The main reason for that is Germany’s robust jobs market. Figures published yesterday showed youth unemployment stood at just 7.9 per cent in June, compared to a European average of 22.6 per cent.