By Bojan Pancevski in Berlin and Tom Fairless in Frankfurt
Fears rose of a spiraling economic slowdown in Europe and Asia
after Germany said its economy shrank in the second quarter and
China reported a raft of weak data.
The bad news from two industrial powerhouses that are closely
interlinked by trade and foreign investment added to market
concerns about the state of the global economy that have prompted a
flight into safe assets. U.S. stocks and bond yields fell on
Wednesday.
The European Union, with a weakening Germany at it core and the
mounting prospect of losing the U.K. as a member without a
negotiated exit on Oct. 31, looks particularly fragile. Recent
eurozone data showed growth in the narrower group of countries that
use the euro had all but ground to a halt.
In Germany, gross domestic product contracted 0.1% in the three
months to June, with economists and government leaders largely
blaming the cool-down in Germany's export-driven economy on the
uncertainty caused by the U.S.-China trade war and the prospect of
an abrupt Brexit.
Meanwhile, the jobless rate in Chinese cities rebounded in July
to its highest level since regular reporting of the data began, and
figures on factory production, consumption, property investment and
other key readings were lower than expected.
Economists and government planners said China's dispute with the
U.S. has dented confidence among its manufacturers, despite a
surprise jump in exports in July. Anticipation is growing that
China will have to deploy additional stimulus measures to keep the
economy growing by its 6-6.5% target.
The Chinese data could portend more pain for Germany, whose car
makers and capital-goods manufacturers are among the most
successful Western businesses in China. The country was Germany's
third-largest export market last year after the U.S. and
France.
The persistent weakness of the Chinese economy means Germany's
will likely stagnate through next year, said Jörg Krämer, chief
economist at Commerzbank in Frankfurt, who expects German GDP to
grow just 0.8% in 2020.
Price-adjusted exports to China from the eurozone rose by an
average of 14% on the year in 2017, but that slowed to 1.5% in the
five months through May 2019, according to Commerzbank.
The latest data from Germany adds pressure on governments to
unleash stimulus measures of their own.
"The new figures are a wake-up call and a warning," said
Germany's minister of the economy, Peter Altmaier, in a statement.
"We are in a weak growth phase but not yet in a recession, which we
can avoid if we take necessary measures. Politicians and businesses
must now act together."
Berlin has faced pressure to loosen its strict fiscal policy to
help drum up consumer demand and investment at home to offset the
slump in exports. It has resisted so far, though it is planning
moderate tax cuts and a new environmental policy, to be unveiled
this fall. Mr. Altmaier said Wednesday corporate tax should be
reduced, and investment into digitization and future technologies
accelerated -- a contentious topic of discussion in the
government.
Central banks in Asia already have begun cutting interest rates.
India and New Zealand were among the first, ahead of the Federal
Reserve's rate cut in late July, and they cut rates again last week
along with Thailand and the Philippines.
The latest data from Germany will likely now heap additional
pressure on the European Central Bank to launch a new stimulus
package at its next policy meeting on Sept. 12 to help revive
confidence. ECB President Mario Draghi has promised a series of new
measures, which could include interest-rate cuts and hundreds of
billions of euros in bond purchases.
"Trade conflicts, global uncertainty and the struggling
automotive sector have finally brought the German economy down on
its knee. In particular, increased uncertainty, rather than direct
effects from the trade conflicts, have dented sentiment and hence
economic activity," said ING's chief economist for Germany, Carsten
Brzeski.
Early indicators and business sentiment surveys point to another
weak performance in the third quarter. That could potentially
indicate a recession, defined by economists as two consecutive
quarters of shrinking output.
Attention is now focusing on just how far the trade dispute
between Washington and China will go.
One U.S. official involved in the talks said a new round of
face-to-face talks with China in Washington next month is unlikely
to progress if Beijing continues to resist making structural
changes to allow U.S. businesses to compete on what they say is a
more even footing.
Wall Street, though, received a lift this week after the Trump
administration suspended plans to impose new tariffs on about $156
billion in goods from China, including smartphones, laptops, toys,
videogames and other goods, that were supposed to take effect on
Sept. 1. "We're doing this for Christmas season, just in case some
of the tariffs would have an impact on U.S. customers," President
Trump said. The Dow Jones Industrial Average rose 1.4% on Tuesday
before falling again on Wednesday. The yield on the U.S. 30-year
Treasury bond fell to a record low.
The mood is more downbeat in Germany and much of the rest of
Europe. German manufacturing output has been shrinking this year
despite a small gain in GDP in the first quarter. Several large
German companies have blamed U.S.-China trade tensions for
disappointing results, including software maker SAP SE, chemicals
company BASF SE and engineering group Siemens AG.
The yield on the German government's 10-year bond touched a
fresh record low of minus 0.624% in Wednesday morning trading,
according to Tradeweb.
In the eurozone, seasonally adjusted industrial production fell
1.6% in June from May, and dropped 1.5% on month in the wider EU,
according to estimates from Eurostat, the EU statistical
office.
Seasonally adjusted gross domestic product grew 0.2% in the
eurozone and the EU in the second quarter of 2019 compared with the
previous quarter, the Eurostat estimate said. The economy grew 0.4%
in the eurozone and 0.5% in the EU in the first quarter.
Germany was the only eurozone country whose economy shrank.
Outside the eurozone, Britain and Sweden also contracted.
Some EU exporters ultimately might benefit if China's businesses
decide to switch U.S. products for European ones, some analysts
say. But the uncertainty surrounding the trade conflict between the
world's two largest economies appears to set to continue
overshadowing whatever happens in Europe, Asia and other parts of
the economy.
Companies in particular will likely find it difficult to plan
and invest without knowing how the trade tensions will play
out.
"This is especially difficult in an export-oriented economy like
Germany's," said Clemens Fuest, president of the Ifo institute, an
independent economic think tank.
--Grace Zhu contributed to this article.
Write to Bojan Pancevski at bojan.pancevski@wsj.com and Tom
Fairless at tom.fairless@wsj.com
(END) Dow Jones Newswires
August 14, 2019 13:01 ET (17:01 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.