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Trade war and no-deal Brexit fears weigh on Germany's struggling economy

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The car industry has weighed heavily on the German economy Credit: Krisztian Bocsi/Bloomberg News

Some Britons may feel a touch of schadenfreude from seeing that the German industrial juggernaut is spluttering but its woes are a troubling symptom of a slowing world economy.

Recession fears are mounting in Europe’s biggest economy after it was revealed this morning that German GDP contracted in the second quarter, falling 0.1pc. 

Its export-reliant economy avoided a technical recession – two consecutive quarters of falling GDP – by a whisker last year but could fail to escape for a second time. Here are the five key problems facing the stumbling German economy as it nears recession.

No-deal Brexit looms large 

The political deadlock in Westminster does not only risk tipping the UK economy into recession.

German businesses have cited the threat of a no-deal Brexit as a key worry paralysing its economy in surveys.  The UK is Germany’s third biggest export market in Europe and fifth globally, amounting to $92bn of goods in 2018.

The German Mittelstand - the small and medium-sized businesses that are key to the country’s economy – fears that a no deal Brexit is a “major ingredient” in a “toxic cocktail that is currently being stirred up in global trade relationships”, warns Marc Tenbieg at the German Mittelstand Association.

He says: “It is a tragedy for both sides of the channel that a functioning and well-established market and trade structures have been jeopardized by poor political decision-making.”

While the no deal cliff-edge is looming large for Germany, it is far from the only factor bringing its beleaguered factories to a standstill.

Caught in the crossfire

Germany has been caught up in the crossfire between the White House and Beijing as factories around the world grapple with climbing trade tensions. 

Its dependency on export markets has made it highly vulnerable to Donald Trump’s trade war upending global manufacturing with German industrial production tumbling 5.2pc year-on-year in June, the biggest drop since 2009.

“The challenges for the German economy are mainly based on international factors: trade conflicts, sanctions and the scenario of a no-deal Brexit,” explains Melanie Vogelbach at the Association of German Chambers of Industry and Commerce. She adds: “Trade wars are never good and for an economy that relies as much on exports as German industry, that is a very important factor.”

The industrial downturn in Germany shows no sign of letting up. More timely business surveys have suggested that its manufacturing woes have worsened in recent months as trade tensions returned.

Lack of economic immunity 

Europe’s biggest economy is hard-wired to the booms and busts of the global economy. 

Its export market for goods is far larger than that of other advanced economies, making it heavily exposed to the global economic cycle.

Germany exported goods worth almost $1.6 trillion in 2018, according to the International Monetary Fund. By comparison, Japan, a larger economy by GDP, exported just over $700bn while the US, the biggest economy in the world, only just edged ahead of Germany with $1.7 trillion.

The eurozone’s production line has been among the hardest hit by the slump in world trade as the slowdown in key trading partner China weighs heavily.

“When China sneezes, Germany catches pneumonia,” says Neil MacKinnon, a strategist at VTB Capital.

China is Germany’s third-largest export market ahead of the Netherlands and the UK and suffered its worst growth in the three months to June since quarterly data began in 1992. 

China’s economy was gradually decelerating even before the trade war but the slowdown has accelerated as goods worth hundreds of billions of dollars face higher US tariffs. 

MacKinnon adds that its economy could face a “double-whammy” from a no deal Brexit “given that Germany exports more to the UK than the UK does to Germany”.

Automotive stuck in reverse

Germany’s most important export, cars, have driven the decline in its ailing manufacturing sector.

The automotive industry accounts for around 5pc of Germany’s total GDP. Its star names, such as Mercedes-Benz maker Daimler and BMW, are being squeezed by falling global car sales and regulatory clampdowns. 

ING economist Carsten Brzeski says the car industry’s troubles “have played and will continue to play an important role” in Germany’’s slowdown.

The struggling Chinese market is key for the country’s car manufacturing giants. In 2018, almost a quarter of all cars sold in China were German, accounting for more than a third of BMW and Daimler’s total sales, according to ING.

“It's not actually the trade conflict that is most concerning but the structural shifts in the Chinese automotive market, which could turn out to be one of the biggest threats in the years ahead,” says Brzeski.

Services sector wobbles

Germany and many other advanced economies have been propped up by their more resilient services sectors in 2019 as strong jobs markets boost consumers.

However, leading economic indicators in Germany suggest the malaise afflicting its manufacturers is spreading.

The services purchasing managers' index slipped to a six-month low in July as business sentiment sank to its lowest level since 2014. Companies cited worries over the outlook for growth and the health of the car industry.

Investor confidence in Germany is also dwindling as a perfect storm of risks brews. A closely watched investor confidence gauge has plunged to its lowest level since 2011, research group ZEW revealed yesterday. 

ZEW president Achim Wambach blamed the shock slump in confidence on a concoction of rising no deal Brexit worries, the escalating US-China trade tensions and the threat of a global currency war.

The German economy is already shrinking but its businesses and investors appear to be bracing for much worse.