Germany avoids recession despite 2018 growth slowdown

Michelle FITZPATRICK, Tom BARFIELD
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Carmakers have suffered bottlenecks as they struggle to make cleaner vehicles

Official data suggested Tuesday that Germany avoided a recession at the end of 2018 but confirmed a sharp slowdown in growth last year as Europe's largest economy cooled off from boom times.

Economic growth sank to 1.5 percent in 2018 from 2.2 percent in the previous two years, federal statistics authority Destatis said.

In absolute terms, Germany's 2018 GDP was around 3.4 trillion euros ($3.9 trillion) or 40,900 euros per person, the statisticians found.

While there had been a "dip" in the third quarter, when output shrank by 0.2 percent, "there were signs of a slight rebound at the end of the year," Destatis expert Albert Braakmann told reporters in Berlin.

Dodging two consecutive quarters of shrinkage -- the official definition of a recession -- means "it currently looks as if the German economy could get away with one black eye," ING Diba bank economist Carsten Brzeski commented.

But "what matters most is the fact that the slowdown of the German economy in the summer has been lasting longer than anticipated and seems to be more than only a temporary blip," he added.

Many observers and the German government pointed to one-off factors to explain the 2018 setback.

Carmakers were confronted with a production bottleneck as they scrambled to adapt to new EU emissions tests, which massively slowed sales from September.

Meanwhile a long drought brought low water levels in the Rhine that hampered shipments of chemicals and raw materials.

But Europe's powerhouse also faces longer-term hurdles to growth.

Uncertainty about Brexit threatens trade with one of Germany's biggest partner countries, while US President Donald Trump's trade showdowns with Brussels and Beijing have weighed on Berlin's massive exports.

For now, observers can take comfort from strong domestic fundamentals, notably historic low unemployment making for high consumer spending.

"There are still plenty of reasons to remain optimistic," economist Brzeski said.

But he pointed to "the lack of investment in digital and traditional infrastructure, delays of railways and airlines or hardly any signficant new structural reforms in the last ten years" as factors that could hobble Germany in the future.

- On the spot -

That increases the pressure on politicians to find ways of cushioning the country against economic slowdown and boosting growth.

While talking up the German economy's strength, Economy Minister Peter Altmaier acknowledged in a recent interview with the Handelsblatt financial daily that the government could do more to give businesses "a tailwind" at a time of sluggish global expansion.

"It makes sense right now to set incentives for growth," said Altmaier, a member of Chancellor Angela Merkel's centre-right CDU, including through "tax relief for companies".

Such demands put him on a collision course with Finance Minister Olaf Scholz of the centre-left Social Democrats, who has said he sees no need for corporate tax cuts and recently warned that "the fat years are over" when it comes to Germany's run of tax revenues overshooting expectations.

That was not yet visible in 2018's public accounts, with federal, regional and local governments booking a combined record surplus of 59.2 billion euros according to Destatis -- the fifth surplus in a row.

Helped by low unemployment, growing wages and the European Central Bank's ultra-low interest rates, income for the state coffers outpaced spending by 1.7 percent of GDP.

- Loosening the purse strings -

Germany, which also boasts a massive trade surplus with the rest of the world, frequently faces calls from abroad to spend more of the proceeds of its wealth to encourage consumption at home -- which would indirectly benefit its trading partners by boosting demand for their goods.

Among the loudest critics is Trump, who regularly rails against Germany's "unfair" trade imbalance and chastises Berlin for not spending enough on defence.

Merkel's coalition government agreed last year to stick to its cherished "black zero" policy of a maintaining a balanced federal budget, but also pledged billions of extra euros in social spending, including on childcare, education and pensions reforms.

The government also vowed to invest in the country's creaking internet infrastructure amid criticism it is failing to prepare the nation for the digital future.

Altmaier has mooted public investments in electric car battery production and European projects on artificial intelligence.

But Berlin remains a laggard on military spending, only committing to raising expenditure from 1.24 percent of GDP last year to 1.5 by 2024 -- well short of the 2.0 percent NATO promise Trump wants upheld.