Trade conflict already sapping German economy

Economic powerhouse Germany is Europe's biggest carmaker
AFP

Stuttgart (Germany) (AFP) – An industrial powerhouse built on massive exports and a gigantic car industry, Germany is among the nations most sensitive to mounting trade tensions between the United States and other major economies.

US President Donald Trump has in recent weeks struck his first tariff blows at the European Union and China, who both vowed retaliation — risking a tit-for-tat trade conflict on two fronts that could weigh on the global economy.

“Germany’s second economic miracle is over,” influential daily Die Welt wrote this week, comparing the years of steady growth since the financial crisis to the post-World War II reconstruction period.

Two respected economic think-tanks sharply lowered their growth forecasts, with Berlin-based DIW cutting its prognosis for this year by half a percentage point to 1.9 percent, and then again to 1.7 percent for next year.

Munich’s Ifo institute was even more drastic, slashing its forecast to 1.8 percent for 2018 from 2.6 percent previously.

At a company level, Mercedes-Benz maker Daimler was the first among Germany’s auto industry titans to lower its profit forecasts this week, prompting business daily Handelsblatt to declare the “end of the party” for the sector and its 800,000 workers.

High-end competitor BMW says it is following the international situation “more closely than ever”.

BMW and Daimler are especially vulnerable, as they face both the threat of US tariffs on their cars and parts shipped from Europe, as well as taxes at the Chinese border on the vehicles they build at massive plants in America.

Meanwhile, Germany’s powerful chemical industry federation said last month it is “less optimistic” for this year given the hardening trade rhetoric.

– Stumbling start –

“Clouds are gathering over the German economy,” whose industrial engine “began sputtering at the start of the year,” said Ifo macroeconomics chief, Timo Wollmershaeuser.

Growth slowed to 0.3 percent between January and March, half the rate recorded in the previous quarter.

Initially, there were suggestions that short-term factors — such as a winter flu outbreak, a calendar packed with public holidays and a wave of industrial disputes — might have been to blame. But weak economic data in April put paid to such arguments. 

Both industrial production and industrial orders — indicators of future economic performance — fell, presaging belt-tightening in the months ahead.

“American economic policy is at least partly responsible” for the slowdown, Wollmershaeuser said.

In purely financial terms, there is little risk to Germany from Trump’s first move against Europe, tariffs on steel and aluminium imports.

The border duties are expected to knock just 37 million euros ($43 million) off a gross domestic product totalling 3.3 trillion euros. 

– Uncertainty bites –

But investments and exports — exactly the elements that powered Germany’s expansion last year — are already suffering from “heightened uncertainty”, said DIW economist Ferdinand Fichtner.

Many German companies manufacture capital goods such as machine tools that are exported all around the world.

That means when foreign companies decide to delay investment in their plants, German manufacturers’ sales slip.

Present trade fears are only a foretaste of what might happen if the US makes good on its threat to tax European car imports.

The move would inflict a five-billion-euro blow on the German economy, or 0.16 percent of GDP, Ifo calculated.

If China also levies taxes on imports of US cars, Daimler and BMW — the two biggest exporters of cars from America — could face plunging sales there too.

One strong pillar of the German economy is strong domestic demand, buoyed by unemployment at its lowest levels since the country’s reunification in 1990, rising wages and higher public spending, the economists note.

But there, too, politics could threaten growth.

Attempts by Chancellor Angela Merkel’s conservative Bavarian coalition partners to force through a tough border policy against refugees threaten to explode the government she spent months cobbling together after tricky September elections.

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