News ID: 1021
Published: 0327 GMT September 01, 2014

German GDP decline signals fading powerhouse

German GDP decline signals fading powerhouse

Cracks are emerging in Germany’s once rock-solid economy as companies’ reluctance to invest bears out European Central Bank President Mario Draghi’s warning that the eurozone recovery is in danger.



Gross domestic product in Europe’s largest economy shrank 0.2 percent in the second quarter, the Federal Statistics Office said, confirming an Aug. 14 estimate.

While part of the drop can be attributed to a mild winter that front-loaded output earlier in the year, the Bundesbank has cast doubt on a second-half rebound and suggested its forecasts may prove too optimistic, Bloomberg wrote.

The weakness of a German economy that has outperformed its peers since the regional debt crisis comes as Draghi ponders adding more stimulus to fight the threat of deflation in the currency bloc. He signaled that declining inflation expectations could tip the ECB into broad-based asset purchases, an option officials may discuss at this week’s policy-setting meeting.

“A weaker German economy weighs on Europe,” said Michala Marcussen, the global head of economics at Societe Generale SA in London. “The euro area is falling into a low flation trap with annual growth and inflation rates stuck between zero and 1 percent. The ECB probably won’t act this time, but I expect Draghi to reiterate his Jackson-Hole message.”

Policymakers will use “all the available instruments needed to ensure price stability” and are “ready to adjust the policy stance further”, Draghi said on Aug. 22 in the Wyoming mountain retreat that hosts the Federal Reserve Bank of Kansas City’s annual economic symposium. The ECB’s Governing Council will set monetary policy on Sept. 4 in Frankfurt.

Capital investment slumped 2.3 percent in the second quarter, with construction declining 4.2 percent, the statistics office said.

Private and government consumption each rose 0.1 percent. Exports climbed 0.9 percent and imports were up 1.6 percent.

Investment was the biggest drag on the economy, subtracting 0.5 percentage point from GDP. Net trade cut 0.2 percentage point, while inventories added 0.4 percentage point.

The drop in investment partly reflects the fact that it surged at the beginning of the year, as a warm winter boosted construction. Even so, the decline also highlights companies’ hesitation to invest amid political tensions in Ukraine, Russia and the Middle East.

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