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German Growth Falls to Six-Year Low, Hit by Manufacturing Recession -- 2nd Update

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01/15/2020 | 09:49am EDT

By Tom Fairless

FRANKFURT -- Economic growth in Germany slumped to a six-year low in 2019, underscoring the vulnerability of Europe's export powerhouse to tensions in the global economy.

A recession in Germany's outsize manufacturing sector, especially its automotive industry, was the main factor behind the tepid performance, the federal statistics agency said Wednesday. Global trade conflicts, a slowdown in China and the uncertainty surrounding Brexit all weighed on Europe's largest economy.

Germany is the first major economy to report full-year growth figures for 2019. The World Bank last week estimated that the global economy expanded by just 2.4% as the decade drew to a close, the weakest growth rate since the financial crisis, and down from 3% in 2018.

China, the world's second-largest economy, is due to release its growth figures for 2019 on Friday, and is expected to record a deceleration.

The German economy grew by 0.6% last year, the slowest rate since 2013, at the height of the eurozone's debt crisis. Output in the manufacturing sector excluding construction, which accounts for around a quarter of the overall economy, fell by 3.6%. Private consumption rose robustly, helping support growth.

Official German growth data for the last three months of 2019 will be published in February. Tanja Mucha, a federal statistics agency official, said the economy probably grew slightly in that quarter.

International trade disputes and the China slowdown have weighed heavily on Germany's flagship auto manufacturers and midsize engineering firms. Together with sweeping changes in the auto industry, those tensions have driven German manufacturing into recession. The slowdown appears to be leveling off, but there are few signs of a rebound.

Germany is among the most open economies in the West and is highly reliant on trade after decades of wage moderation, rising taxation, government belt-tightening and corporate cash hoarding have weighed on domestic demand.

Many German companies have been laying off staff, raising concerns that the manufacturing slowdown could start to affect private consumption.

Brose Group, an auto parts producer, said in October it would reduce its German workforce by around 2,000 by late 2022. It blamed the declining auto market, especially in China. Continental AG, a giant auto parts manufacturer, announced plant closures in Germany in November as part of a sweeping restructuring plan.

German car production fell to its lowest level in almost a quarter of a century last year, according to the VDA auto lobby group. Weakness in the auto sector likely trimmed German growth by 0.75 percentage points in 2019, according to the Ifo economic think tank.

Germany's slowdown helped trigger an aggressive response in September from the European Central Bank, which cut interest rates and launched an open-ended bond-buying program to shore up growth.

Other major central banks, including the Federal Reserve, also loosened policy last year as global trade growth fell to its lowest level since the financial crisis.

Germany's government has rejected requests for it to prop up its economy through debt-financed spending, despite being paid by investors to borrow money.

This week, the finance ministry reported a larger-than-expected budget surplus for 2019, its sixth surplus in a row. Together with social security funds, the nation recorded a total budget surplus worth around 1.5% of gross domestic product, said Joerg Kraemer, chief economist at Commerzbank.

German businesses are calling for greater investment in digital and transport infrastructure as a way to boost productivity and confidence. In a nod to such demands, the government this week announced an EUR86 billion ($96 billion) rail investment program.

Still, politicians are constrained by a constitutional debt brake that outlaws budget deficits over the economic cycle. Economists also argue that a surplus makes sense for an aging country like Germany and will fade over time.

The U.S. Treasury Department trained its sights on Germany this week, even as it eased pressure on China by dropping the country's designation as a currency manipulator.

The Treasury's foreign-exchange report, which addresses the currency practices and macroeconomic policies of major U.S. trading partners, urged Germany to cut taxes and undertake reforms to boost domestic investment and consumption. German officials typically counter by saying the nation's large welfare state means there's less need to increase spending during a downturn.

Meanwhile, Europe remains vulnerable to renewed flare-ups in economic tensions involving the U.S., notwithstanding the latest trade deal with China, as well as rising geopolitical stress involving Iran, Brexit negotiations and strikes in France.

German exports fell 2.3% on the year in November, hurt by a fall in exports to China.

"As German machine builders we feel that huge uncertainty exists in China," Carl Martin Welcker, president of Germany's Mechanical Engineering Industry Association, said in December.

Germany's unemployment rate edged up to 4.9% last month, while job openings fell and more firms reduced working hours to save jobs, according to the Federal Employment Agency.

The auto workforce in Germany has shrunk by 1.3% since the start of 2019, after adjusting for seasonal variations, Ifo said. Some 14% of auto companies say they have shortened working hours to avoid layoffs.

With Chinese economic expansion unlikely to return to earlier rates, German growth "will remain close to zero for now," said Marco Wagner, an economist at Commerzbank.

Write to Tom Fairless at tom.fairless@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
COMMERZBANK AG -4.06% 3.357 Delayed Quote.-36.58%
CONTINENTAL AG 0.57% 70.1 Delayed Quote.-39.53%
EURO / BRITISH POUND (EUR/GBP) -0.74% 0.87622 Delayed Quote.4.58%
UNITED PARCEL SERVICE 5.40% 97.88 Delayed Quote.-20.63%
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