Thursday 23 May 2019

Germany on the rebound but China slowing

German multinational conglomerate Thyssenkrupp reported a drop in profit. Photo: AFP/Getty Images
German multinational conglomerate Thyssenkrupp reported a drop in profit. Photo: AFP/Getty Images

Piotr Skolimowski

Germany's economy emerged from stagnation at the beginning of 2019, returning to growth despite a slump in manufacturing that could worsen because of escalating global trade tensions.

The 0.4pc expansion signals some strength across the euro-area in the first quarter amid a better-than-expected performance in a number of countries. But industry is under pressure and the region is at risk of being sucked into an increasingly tense US-China trade conflict.

Global worries were heightened on Wednesday, with reports showing the Chinese economy continues to cool despite efforts by the government and the central bank. Figures pointed to slower growth in industrial output, retail sales and investment at the start of this quarter.

China's economic loss of steam in April underscoring the fragility of the world's second-largest economy as it girds for an intensified face-off with the US over trade.

Industrial output, retail sales and investment in China all slowed more than economists forecast. Germany's first-quarter pickup matched the median forecast of economists. The statistics office said there was a boost from consumer spending, construction and equipment investment, while there were "mixed signals" on trade. In the euro area, growth was also 0.4% in the period, twice the pace of the previous three months.

"Germany's economy performed strongly in first quarter, withstanding a slowdown in external demand and weakness in its manufacturing sector. And we expect the headwinds to weaken by year-end," said David Powell, A Bloomberg euro-area economist. "The euro area's largest economy is unlikely to give the European Central Bank any justification for additional monetary stimulus."

Bloomberg Economics also notes that the lift from construction spending may be temporary and economic growth could "decelerate slightly" this quarter. UniCredit economists share that view and say it's "not out of the woods yet". German bonds rose, pushing 10-year yields close to minus 0.1pc, the lowest since 2016.

Europe's largest economy barely skirted a recession last year after it took a hit from factors including disruption to auto production. While some of those issues have faded, more pronounced protectionist measures could damp business sentiment in the export-heavy nation.

Thyssenkrupp on Tuesday noted a "weakening macro environment" as it reported a drop in profit. Growth in Germany is forecast to slow to 0.5pc this year from 1.4pc in 2018, according to the government. Euro-area expansion is predicted by economists to ease to 1.2pc from 1.9pc. The slowdown, along with weak inflation, has prompted the ECB to delay interest-rate increases.

But solid domestic demand is giving hope to some officials about the second half of the year. They hold their next policy meeting on June 6, when their updated projections for the economy will determine how favourable they want to make a new round of loans they're offering banks.

Bloomberg

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