×

German economy expected to slow down in second quarter

Europe's powerhouse could be stalling. German economic growth looks set to show a dip in the second quarter, raising questions about the health of the euro zone's largest economy in the wake of the Brexit vote.

Economists polled by Reuters expect Germany's gross domestic product (GDP) figures, due Friday morning, to increase by a mere 0.2 percent in the months from April to June, compared with 0.7 percent growth in the previous three months.

Experts said the export-driven economy is struggling to sustain momentum in an uncertain global environment that encompasses the unsteady emerging economies and the uncertainty surrounding Brexit.

This has sparked fears among Europe-watchers as the country is by far the 28-country European Union's biggest economy and when Germany catches a cold, it affects the rest of the region.

'It is not pretty'

Flat Tire, flat market concept
Getty Images

"No matter how you look at it, the economy is slowing," said Carl Weinberg, chief economist at High Frequency Economics. "The economic trend is clear. It is not pretty."

Weinberg pointed to retail sales, industrial production, and export data stalling Germany's growth engine. The country's economic expansion, fueled by robust consumption and international trade, has been a bright spot in the euro zone in recent years. But global developments, including a slowdown in emerging economies from lower commodity prices as well as the U.K.'s vote to leave the European Union, could weigh on the outlook.

"All of the risks are to the downside," Weinberg said.

German industrial production declined by 1 percent average in the March-June quarter, with weakness in the energy and construction sectors. Factory orders in June came in below expectations, dropping 0.4 percent in June. Economists from Barclays said orders for large transport equipment could have been postponed ahead of the Brexit vote.

"Uncertainty stemming from the UK's Brexit vote will weigh on international trade and investment and with this on the demand for German industrial goods," wrote the Barclays economists in a research note.

Most of the economic effects from Brexit will not show up in the GDP data until later this year, said HSBC economist Rainer Sartoris. Sartoris expects consumer spending to stall in the second quarter, primarily due to higher oil prices, but said Germany's buoyant labor market will keep driving consumption growth in later quarters.

"Inflation was higher and this was a hit on real income," Sartoris said. "This will feed through to consumer spending, but overall I think that it's important we still think that the basic story on consumer spending is positive."

While Germany accounts for roughly one-fifth of euro area GDP, Sartoris said one bad report this quarter is unlikely to have any substantial negative effect on the broader region. The European Commission will also release updated GDP figures for the euro area Friday morning. Second quarter growth is expected to grow around 0.3 percent.