German economy faces recession fear

BERLIN - Three years into the euro zone debt crisis, the gravity-defying German economy has stalled and some fear it could fall into recession in the second half of this year.

Over the past week, Europe's largest economy has been hit by a series of increasingly gloomy data releases, showing declines in manufacturing orders, industrial output, imports and exports.

In an unusually stark warning on Friday, the economy ministry said these figures and a sharp drop-off in business sentiment in recent months pointed to "significant risks" to Germany's outlook.

Next Tuesday, gross domestic product data for the second quarter is expected to show modest growth of about 0.2 percent. But the danger of recession in the second half of the year is growing, leading economists say, at a time when Europe's single currency bloc desperately needs growth from its economic powerhouse.

The slowdown carries risks for German Chancellor Angela Merkel, who will seek a third term in an election one year from now, and could influence public opinion on her crisis-fighting strategy especially if a nascent rise in unemployment accelerates.

"The German economy is losing momentum - there's no doubt about that - and in the third quarter the economy will shrink compared to the second quarter," said Joerg Kraemer, chief economist at Commerzbank.

"Things will go downhill from here. The German economy is not faring as badly as the rest of the euro zone but it can't disconnect itself, especially as growth in China has slowed and continues to do so."

Germany is known for its export-driven growth, but the euro crisis has hit its biggest market. Roughly 40 percent of the country's exports go to its partners in the currency zone and 60 percent to those in the broader European Union.

Domestic disappointment

The hope heading into 2012 was that private consumption would compensate for the widely expected decline in German exports. Low interest rates, a robust labour market - German unemployment stood at just 6.8 percent in July - and strong wage rises for both the public sector and manufacturing industry were expected to fuel domestic demand.

But recent data has been disappointing, with retail sales falling back.

Last month, the chief executive of Germany's Metro , the world's No. 4 retailer, said retail conditions were worsening, with worries over the debt crisis overshadowing other factors that might encourage Germans to spend.

Markus Schrick, head of Korean carmaker Hyundai's German division, told Reuters he expected a sharp slowdown in sales in the second half of 2012 as customers became more cautious about spending.

"The situation is difficult at the moment, there's no doubt about that," he said. "We're bracing for more difficulties ahead."

Peter Bofinger, one of five 'wise men' who advise the German government on the economy, said recent industrial output data suggested the country was on the verge of a technical recession.

"It's not the case that Germany can counter the weaker international economic situation with its own dynamism," Bofinger told Reuters.

It is too early to predict how the looming slowdown could affect Merkel's prospects for 2013 or influence the intense debate in Germany over giving aid to struggling euro partners such as Greece and Spain.

A poll for public broadcaster ARD earlier this month showed 63 percent of Germans believe the economy is in good shape.

The main reason for that is the robust labour market. Figures published on Friday showed youth unemployment in Germany stood at just 7.9 percent in June, compared to a European average of 22.6 percent.

Still, signs are emerging that a nearly uninterrupted six-year drop in unemployment is coming to an end.

Seasonally adjusted joblessness has risen, albeit modestly, for the past four months. And big German companies - from Deutsche Bank to energy firm RWE and steel distributor Kloeckner - are pressing ahead with thousands of job cuts.

"We expect the economic slowdown to start pushing up corporate insolvencies from the autumn," Christoph Niering, head of the VID insolvency association, said.

The same poll in which nearly two in three Germans said they were happy with the current economic climate also showed a sharp spike in the number of respondents who believe the economy will deteriorate over the coming year.

At 56 percent, that total is now at its highest level since early 2009, shortly after the bankruptcy of Lehman Brothers triggered the global financial crisis and plunged Germany into its deepest recession in the post-war era.

The ARD survey showed that 84 percent of Germans believe the worst of the debt crisis is still to come.

Euro rescue impact

The unanswered question is whether a weakening economy will make Germans less likely to support government rescue efforts for the broader euro zone.

Merkel has said repeatedly over the past year, most recently in a statement with French President Francois Hollande last month, that she will do everything to save the euro.

But not all Germans support that course and the chancellor's room for manoeuvre appears to be shrinking at a time when both Greece and Spain may soon require new rescues.

"The stabilisation of the currency union should not be a goal in and of itself, regardless of the costs associated with that course," Otto Kentzler, president of the German Confederation of Skilled Crafts, wrote in a position paper published by the Handelsblatt newspaper on Friday.

Klaus-Peter Schoeppner, head of the Emnid polling group, said he did not expect a weakening economy to damage Merkel or her party for now.

But he described her rescues of Greece, Ireland, Portugal and Spain as the government's "Achilles heel".

"This will only get bigger as the government's ability to dole out new money comes under strain" from a weakening economy, he said. "They will have to be very careful going forward."