German economy could fall into recession in H2

Three years into the eurozone debt crisis, the gravity-defying German economy has stalled and some fear it could fall into recession in the second half of this year.

Over the past week, Europe’s largest economy has been hit by a series of increasingly gloomy data releases, showing declines in manufacturing orders, industrial output, imports and exports.

In an unusually stark warning on Friday, the economy ministry said these figures and a sharp drop-off in business sentiment in recent months pointed to “significant risks” to Germany’s outlook.

Next Tuesday, gross domestic product data for the second quarter is expected to show modest growth of about 0.2 per cent. But the danger of recession in the second half of the year is growing, leading economists say, at a time when Europe’s single currency bloc desperately needs growth from its economic powerhouse.

The slowdown carries risks for German Chancellor Angela Merkel, who will seek a third term in an election one year from now, and could influence public opinion on her crisis-fighting strategy especially if a nascent rise in unemployment accelerates.

“The German economy is losing momentum – there’s no doubt about that – and in the third quarter the economy will shrink compared to the second quarter,” said Joerg Kraemer, chief economist at Commerzbank.

Germany is known for its export-driven growth, but the euro crisis has hit its biggest market.

Roughly 40 per cent of the country’s exports go to its partners in the currency zone and 60 per cent to those in the broader European Union.

China, one of Germany’s fastest growing markets representing roughly seven per cent total exports, is also slowing.

Chinese data this week showed factory output rising at is slowest pace in three years, new loans at a 10-month low and export growth grinding to a halt.

The hope heading into 2012 was that private consumption would compensate for the widely expected decline in German exports.

Low interest rates, a robust labour market and strong wage rises for both the public sector and manufacturing industry were expected to fuel domestic demand.

But recent data has been disappointing, with retail sales falling back.