Germany: Will Europe’s engine room stall?

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Germany has played the role of predictable engine, chugging away at the heart of the euro zone machine while some of the cogs around it threatened to fly off, for much of the post-credit crisis era.

Yet with German factory orders down 5.7 percent month-on-month in August, well below the 2.5 percent drop expected by analysts, there are signs that this particular engine may be stalling.


The numbers are "grim," Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics, wrote in a note.

The "broad-based weakness" (as Vistesen describes it) in orders, as demand both inside and outside Germany fell, suggests that blaming the weakness on a sole factor, such as sanctions imposed by and against Russia, may be inaccurate.

German magazine Der Spiegel reported at the weekend that the International Monetary Fund (IMF) is planning to cut its estimates for German economic growth in 2014 and 2015 to about 1.5 percent for each year, owing to geopolitical tensions.


If Germans feel less secure economically, there are concerns that this might put their relationship with the rest of the euro zone at risk.

The stronger performance of the anti-euro Alternative für Deutschland party, in recent local elections, has heightened pressure on German Chancellor Angela Merkel to become less centrist and more conservative. It could herald "a potential tectonic shift in Germany's domestic politics," and force Merkel to take a stronger line with her euro zone partners, Alistair Newton, senior political analysts at Nomura, warned in a research note.


Yet there is still plenty of optimism about German performance on other indicators.

"If you take a step back, the medium term prospects for Germany look good. House price growth, employment – all look good. In the very short term, it is sensitive towards international growth," Paras Anand, head of pan-European equities at Fidelity, told CNBC.

"Taking all the evidence into account, Germany appears to be recovering," analysts at JP Morgan argued in a research note. Recent weakness is more because of the comparisons to "strong gains" at the start of the third quarter, rather than "fundamental deterioration of the economic outlook," they wrote.


- By CNBC's Catherine Boyle