Euro-zone Debt Crisis Weighs on Germany Economy
By Christopher Lawton

Published August 13, 2012

Dow Jones Newswires

The German economy likely escaped contraction in the second quarter, but hopes that Germany could be spared the effects of the sovereign debt crisis and keep the euro zone out of recession have probably been dashed, analysts say.

Germany's preliminary second-quarter gross domestic product, the broadest measure of a country's economic output, likely rose by 0.2% on the quarter, according to 27 analysts surveyed by Dow Jones. Germany's Federal Statistics Office, Destatis, is due to release the data at 0600 GMT Tuesday.

In the first quarter, output had risen by a surprisingly robust 0.5%.

Germany's Economics Ministry on Friday said the economy likely grew modestly in the second quarter thanks to exports, which rose 1.6%, and to private domestic consumption. That was in line with an earlier statement from the Deutsche Bundesbank, Germany's central bank, which had noted that growth in the construction and the service sector offset weakness in industrial production.

Destatis won't provide a full breakdown of its data until August 23.

Economists warn that a string of economic data and surveys suggest even this modest economic growth pace won't last. Economic growth outside of Europe is moderating, reducing demand for German exports, while the confidence-sapping effects of the euro-zone debt crisis are finally reaching the country, long seen as immune due to its lower debt levels and reformed labor market.

Together this paints a largely uncertain future for Europe's largest economy that could make Germans even more reluctant to support bailouts for Spain, Greece and others.

"Germany was seen very much as the key to the end of the euro-zone debt crisis. Now it's clearly not the case," says Jonathan Loynes, chief European economist for Capital Economics.

Not long ago, some experts thought Germany could help lift up struggling states on the euro zone's geographic periphery by buying their goods. Recent developments have undermined that belief. German consumers, who until now helped support the economy through spending, also appear to be losing confidence. German retail sales were down for the third month in a row in June, Destatis said.

Disposable income may also start coming under pressure from the renewed use of shorter working hours by companies, a measure they deployed during the financial crisis to avoid lay-offs. But even that flexibility at corporate level might not be enough to stop unemployment rising slightly in the second half of the year, says Carsten Brzeski, economist with ING in Brussels.

ThyssenKrupp AG (TKA.XE), an industrial conglomerate and large steel producer, has introduced shorter working hours for some staff at its German factories in response to the weak economic situation and uncertainty from the debt crisis. The company expects to keep that regime in place until the end of the year due to muted demand.

Export markets are waning as well. Large German markets such as China and the United States exhibited some weakness in the second quarter. That is likely to weigh on exports in the second half of the year, says Thomas Harjes, economist with Barclays.

"I wouldn't exclude at this stage a slight contraction [in GDP] in the third quarter," Mr. Harjes says.

German exports in June fell 1.5% on the month to 92.3 billion euros ($113.86 billion) in adjusted terms, while imports dropped 3% to 76.1 billion euros, Destatis said last week. Seasonally-adjusted factory orders also fell 1.7% in June, as demand from the euro zone tumbled, the Economics Ministry said last week. Germany's closely- watched Ifo business confidence survey also registered its third straight monthly decline in July thanks to the crisis.

All this points to an upcoming soft patch for the German economy, as indicated by the Economics Ministry on Friday, when it described its outlook going forward as "cautious" and subject to "significant risks."

"All these growth drivers of the German economy over the last two to three years are losing steam," Mr. Brzeski says, referring to exports and consumer demand.