German contraction a danger to fragile euro-zone recovery
A weakening German economy, with second quarter GDP shrinking 0.2 per cent, comes as ECB considers more stimulus to fight deflation
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 euro-zone recovery is in danger.
Gross domestic product in Europe's largest economy shrank 0.2 per cent in the second quarter, the Federal Statistics Office said yesterday, confirming an August 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.
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 signalled 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, global head of economics at Societe Generale in London. "The euro area is falling into a 'lowflation' trap with annual growth and inflation rates stuck between zero and 1 per cent. 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 August 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 Thursday in Frankfurt.
Capital investment fell 2.3 per cent in the second quarter, with construction declining 4.2 per cent, the statistics office said. Private and government consumption each rose 0.1 per cent. Exports climbed 0.9 per cent and imports were up 1.6 per cent.
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.
