German downturn casts shadow over world economy

DAVID McHUGH
AP Business Writer

FRANKFURT, Germany (AP) — As if the global economy didn’t have enough troubles, it looks like Germany, Europe’s traditional growth engine, risks falling into recession — or growth so weak it holds back the entire euro currency union’s weak recovery.

Europe’s largest economy has seen a run of lousy numbers for factory orders, industrial production, exports and business confidence. All that’s bad news because exporting industrial goods such as machines and cars is the heart of Germany’s globally linked economy.

And if Germany isn’t selling goods, it suggests other parts of the world’s economy are not strong enough to keep buying them.

Global stock markets tumbled this week, in part due to the German figures, with the U.S. logging its worst day of the year on Thursday. Germany’s DAX blue chip index was down a painful 2 percent on Friday.

But are things in Germany all that bad? Economists are debating whether it’s really time to use the R-word and predict a shallow recession. That would be another quarter of negative output in the third quarter, which ended Sept. 30, following shrinkage of 0.2 percent in the second quarter.

Here are the key issues.

AS GERMANY GOES: So does Europe, in many ways. Strong business activity in Germany has made the overall growth figure for the 18 countries that use the euro look a lot better in the past few years. And Europe showed zero growth in the second quarter. Germany is 28 percent of European GDP. And the value chain for companies in other countries often runs through Germany. Suppliers in Italy or France, for example, sell chemicals, coatings or parts to a Germany company that assembles the final factory machine or car.

GLOBALLY SPEAKING: A renewed slump, or long-term stagnation in Europe is a risk for the global economy as a whole. That’s one reason why International Monetary Fund chief Christine Lagarde keeps urging more stimulus for the region. The European Union, of which Germany is the biggest economy, is the world’s largest economy and trading bloc. It’s a key export market for many firms in the U.S., and a source of investment capital, big-ticket goods and technology for China. In particular, U.S. auto firms such as Ford Motor Co. and General Motors, through its Opel subsidiary, have struggled through a long slump in consumer demand for cars in Europe.

STIMULUS NEEDED: Things in Europe are so worrisome that the European Central Bank is launching more stimulus measures. It cut its interest rate to near zero and is preparing to purchase bundles of bank loans to encourage more lending. Yet even bank President Mario Draghi has warned that the stimulus will not be effective unless several eurozone governments act to make their economies more business-friendly. France and Italy are often mentioned as countries that could make labor rules more flexible to encourage hiring and investment. But progress is slow.

THE PUTIN EFFECT: Germany makes what economists call investment goods — big-ticket items like printing presses, heavy trucks, or industrial lasers that companies use to make other goods. Uncertainty makes businesses and consumers hesitate, because they can always put off such purchases until things look a little clearer. That’s the effect of the conflict between Russia and Ukraine, which has resulted in the EU and the U.S. imposing economic sanctions on Moscow. Business in the Middle East has also been dented by military conflict in Syria and Iraq.

IN THE BLACK: Some say Germany can help right its economy by spending more. It has good public finances, after all. But Chancellor Angela Merkel’s government has focused on balancing the budget, even as her governing partners, the Social Democrats, have called for more investment spending to fix roads and bridges. Germany can borrow money for essentially zero interest on bond markets; even its longer 10-year bonds yield an astonishingly low 0.91 percent annually, compared with 2.31 percent for U.S. 10-year Treasuries.

But Finance Minister Wolfgang Schaeuble has made it clear the government’s in no mood to increase borrowing.

DON’T PANIC: Andreas Rees, chief Germany economist at Unicredit, says he’s “not in the doomsday camp” predicting a recession. He points out that the German economy has several “airbags” to cushion the bumps and help growth resume. Those include low unemployment of only 4.9 percent, which supports consumer demand from Germany’s large domestic market. A weaker euro — which has dropped to $1.26 from $1.39 in May — should help exporters in coming months. And growth in the U.S. economy should provide more demand for German exports.

In particular, Rees points to a calendar effect that made the latest figures industrial production and exports look particularly bad. Summer vacations were bunched up in August, shutting auto plants at the same time.

LOOKING FORWARD: Rees says the next reading of the Ifo institute’s business confidence survey — a closely watched indicator of where the economy may be going in the months ahead — will be a key indicator of how things are developing. It’s out Oct. 27.

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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