Germany’s export-centered economy is struggling as global trade tensions worsen. GDP contracted in the second quarter and the Bundesbank predicts it could shrink again in the third, and the US-China trade war escalated again at the end of last week.
Blue chips including Henkel AG and Siemens AG have predicted weaker earnings, and the German government has signaled it’s open to fiscal stimulus if the current downturn turns into a more severe crisis.
Ifo’s business climate index fell to 94.3 in August, marking its fifth straight decline. It was weaker than the median estimate in a Bloomberg survey of economists, and gauges for expectations and current conditions also worsened.
“In manufacturing, the fall in the business climate indicator has yet to find a floor,” Ifo President Clemens Fuest said in a statement. “Not a single ray of light was to be seen in any of Germany’s key industries.”
Economic momentum has stalled for the past year, and there are few signs the situation will improve any time soon. A separate report last week showed orders at factories and services companies dropped at the fastest pace in six years.
Trade prospects have taken another turn for the worse. China said Friday it will impose additional tariffs on a total of $75 billion of U.S. goods in retaliation for President Donald Trump’s latest planned levies. Trump raised import duties in response. He announced Monday that Chinese officials had asked to restart trade talks.
So far, Europe has largely suffered indirectly. But it may be dragged into the conflict if the U.S. administration delivers on its threat of import duties on cars, a key German industry.
The economy’s disappointing performance lately has amplified calls for fiscal stimulus. The government is studying its options in case the outlook deteriorates. For the moment though, the Bundesbank doesn’t see any urgent need. Unemployment is near record lows, companies continue to invest and domestic demand remains resilient.
The European Central Bank has all but committed to another boost as early as next month. Officials are worried that investors are losing faith in their ability to revive inflation, minutes from their July meeting showed last week, sparking speculation a broad stimulus package is in the cards.