The Big German Engine That Can't-----Its EM, Russian And European Export Markets Are Shriveling

Todd Buell And Ulrike Dauer at The Wall Street Journal

A drop in German exports added to a string of ugly data for Europe’s biggest economy, suggesting Germany’s growth has faltered and the country might even be in a shallow recession.

German exports in August fell 5.8% from the previous month, data released on Thursday showed, the biggest monthly decline since the 2009 recession. The slide in exports came after poor readings for German manufacturing orders and factory output, and added to the gloom surrounding Europe’s economic outlook.

Leading German economics institutes also sharply cut their growth forecasts for this year and next on Thursday, warning that sagging domestic business confidence and export prospects will weigh on Europe’s industrial powerhouse.

Gathering signs that Germany is facing a period of stagnation come as the eurozone’s economic recovery, already anemic since it began in 2013, is in danger of losing steam altogether.

Feeble growth across most of the Continent, and stubbornly high unemployment in many eurozone countries, are pressing Europe’s governments to rethink their recent focus on budget austerity. With inflation running at far below normal levels, the European Central Bank is also under pressure to stimulate economic activity through new asset-purchase programs, although such proposals face deep political skepticism in Germany.

The German economics think tanks, in a twice-yearly joint forecast report, said Germany’s economy will expand only 1.3% this year and 1.2% next—rather than by 1.9% and 2% as forecast this spring.

The still-depressed state of the eurozone has hurt German companies’ sales in Europe. But until recently buoyant demand from emerging economies helped to compensate. Slowing growth in Asian and other emerging economies is now taking away that prop. “The slowdown of growth in emerging markets remains the only plausible explanation for Germany’s economic slump,” said Commerzbank chief economist Jörg Krämer.

Ms. Merkel, here in Berlin on Thursday, says her government is mulling ways to spur business investment. Action Press/Zuma Press

At the same time, uncertainty over the Russia-Ukraine conflict and other geopolitical tensions may also be hurting economic sentiment in Germany.

Many German companies are increasingly nervous about the outlook. “I fear that sales growth this year might only be 3%,” said Rainer Hundsdörfer, chairman of the board at EBM Papst, a maker of fans and ventilation equipment from the southern German town of Mulfingen. Last year, he said, the company’s sales were about 12%.

Germany’s weakening growth has sparked a debate within Chancellor Angela Merkel ’s governing coalition about ways to revive business investment, which has remained at depressed levels since the financial crisis. On Thursday, Ms. Merkel said at a Berlin news conference that her government was looking at ways to spur investment, particularly in the digital sphere, and reduce red tape for businesses. “We are very much determined to continue on this path and will talk about these issues in Europe,” she said.

Germany has drawn criticism from elsewhere in Europe for refusing to boost spending at the risk of endangering Ms. Merkel’s campaign pledge to deliver Germany’s first balanced federal budget since 1969 next year. Some voices within the German ruling coalition are also now calling for income and payroll tax cuts to boost demand in the economy.

But German Finance Minister Wolfgang Schäuble reiterated on Thursday his country’s opposition to deploying more government spending to lift growth in the eurozone, and highlighted the need for economic overhauls in Europe. “To increase the [public] funds doesn’t solve the problem,” he said at a seminar organized by the International Monetary Fund in Washington.

Activity is weakening in other eurozone countries, too, recent data suggest.

France’s trade deficit widened in August as the country’s exports fell faster than its imports. Exports of industrial equipment and chemicals were among the sectors that suffered from falling foreign demand.

French business officials say a poor domestic economic environment is compounding weak demand abroad. “There is a climate of fear and distrust, so small business leaders hesitate to take the risk,” said Michel Druger, a delegate at export federation Club des Exportateurs de France.

The U.K. government’s finance chief, George Osborne, warned that the gloomy outlook on the Continent could hurt Britain’s recovery, which has gathered pace since 2013. “The eurozone risks slipping back into crisis. Britain cannot be immune from that—indeed it is already having an impact on our manufacturing and our exports,” Mr. Osborne told the British Broadcasting Corp.

In Germany, business leaders have pleaded for higher public spending, including on Germany’s increasingly neglected infrastructure. “We are in a desperate need of more investment,” Volker Treier, international chief economist of the German Chamber of Industry and Commerce, said. “We are missing almost €20 billion ($25.4 billion) per year of public investment in infrastructure.”

A survey of business sentiment among Germany’s legion of midsize family-owned companies, known as the Mittelstand, showed the mood worsened in September for the sixth month in succession. The survey puts “a big question mark behind Germany’s economic growth prospects for this year and next,” said Jörg Zeuner, chief economist at bank KfW. Even current, reduced growth forecasts for Germany might prove too optimistic, he said.

Other observers are more upbeat. Carsten Brzeski, an economist at ING in Frankfurt, predicted the German economy will grow by 1.5% next year—respectable by German standards—thanks to solid consumer demand and a lower euro exchange rate, which should help exporters if it is sustained.

“A weaker euro could have a positive effect on our group operating profit,” said a spokesman for Linde AG, a German industrial gases and engineering company.

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