The case for fiscal stimulus strengthens in Germany

German real GDP shrank in the second half of the year, reinforcing our view of a significant ECB action in September.

The German economy shrank by 0.1% quarter-on-quarter (q-o-q) in Q2. Today’s report contained some positive news, notably regarding the resilience of domestic demand.

Nevertheless, the ongoing trade disputes between China and the US, China weakness, the threat of auto tariffs and the threat of a no-deal Brexit to supply chains, in addition to the auto sector’s own issues, are all factors that make us much more cautious about the H2 economic prospects than before. As result, we have revised our 2019 GDP growth forecast for Germany sharply down to 0.5%.

The pressure on the government to act will likely increase but abandoning the “Black Zero” has a big political cost that no party is ready to shoulder, especially ahead of regional elections in September and October.

The trend in the latest German data will clearly ring more alarm bells at the European Central Bank (ECB), reinforcing our view of significant ECB action in September.

Read full report here

 

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