Photograph by Sean Gallup/Getty Images
German Chancellor Angela Merkel
While much of the rest of the euro area is in recession or close to it, Germany has managed to keep growing as painful labor market reforms in the early 2000s boosted productivity and restrained wage growth. With help from a weak euro, Germany has offset weak demand from the euro region with exports to emerging markets, especially China, which values German-built trains, power equipment, and machine tools.
Yet the crisis is catching up with Europe’s top economy. Business confidence fell to its lowest level in more than two years in June amid speculation about Greece leaving the euro and Spain’s banking woes. The latest data show growth slowing as austerity measures across the region curb Europe’s demand for German-made cars, machinery, and more. A survey of purchasing managers published June 21 shows German manufacturing shrinking at the fastest pace in three years. German retail sales unexpectedly fell for a second month in May. Unemployment climbed in June for the fourth month this year. “The German economy is clearly slowing down, and a contraction in the second quarter looks possible,” says Carsten Brzeski, senior European economist at ING Group (ING) in Brussels. While Germany is in better shape than its peers, “the most solid ship can capsize in a rough thunderstorm.”
Some of the biggest companies are feeling the squeeze. “It’s going to be quite a rocky road to hit our targets for the rest of 2012,” Siemens (SI) Chief Financial Officer Joseph Kaeser told analysts June 26. Commerzbank (CRZBY), which needed government aid to survive the 2008 crisis, is closing its real estate and ship-finance units. At the end of March, Commerzbank still had €2.9 billion ($3.6 billion) in Spanish loans on its books.
Even double-digit export growth to China has dropped to 6 percent. In China “the slowdown is concentrated in investment and heavy industry,” Germany’s specialty, says Andrew Batson, research director in Beijing for macroeconomic consultants GK Dragonomics. “So it makes sense [if] we see a slowdown in Germany’s exports to China.”
Countries dependent on German customers might suffer, too. Andreas Rees, an economist at Unicredit (UCG) in Munich, says Italy and Spain have expanded their exports to Germany in recent quarters. “An economic slowdown in Germany could mean that Italy and Spain would have to do without this growth stimulus,” says Rees.
Germany is not falling off a cliff. After years of below-inflation wage hikes, the unions obtained healthy raises this spring, and consumer confidence is solid. The economy may still grow 1 percent this year. Yet even ordinary Germans are feeling the psychological weight of the euro debt crisis. “I am pessimistic about the future,” says Winfried Wettig, a Frankfurt taxi driver. “Either we write checks for the countries in trouble, or they go downhill and our economy is going to suffer.” As Italy and Spain probably head for sovereign bailouts, Germany’s creditworthiness could be undermined when it finances yet another rescue effort, says Jamie Stuttard, Fidelity Investments’ head of international bond portfolio management in London.
The recent agreement at the Brussels summit to allow for a direct recapitalization of Spanish banks by the EU’s bailout funds may break the vicious cycle that has prolonged the crisis. Moves toward fiscal and banking union could take the heat off debt-troubled countries and help growth in the euro region overall, which would keep Germany on a sounder footing. Says Nomura International Senior Economist Jens Sondergaard: “A recession in Europe could push Merkel and the Bundesbank to embrace monetary loosening and fiscal expansion.” So would a recession in Germany.
The bottom line: Germany is more open to European stimulus spending as exports stall and its GDP growth falls to an expected 1 percent this year.