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Germany's economy shrinks for the first time since early 2015

Key Points
  • Germany's economy just saw its worst quarter for several years, flash data showed on Wednesday morning, but with news of a draft Brexit deal and Italy refusing to budge on its controversial budget plans, you'd be forgiven for not noticing.
  • Initial third-quarter growth data showed the Germany economy shrunk by 0.2 percent quarter-on-quarter, the first time it has contracted since the first quarter of 2015, according to Reuters.
  • It was also below an estimate for a 0.1 percent contraction.
Berlin, Germany
ullstein bild | ullstein bild | Getty Images

Germany's economy just saw its worst quarter for several years, flash data showed on Wednesday morning, but with news of a draft Brexit deal and Italy refusing to budge on its controversial budget plans, you'd be forgiven for not noticing.

Initial third-quarter growth data showed the Germany economy shrunk by 0.2 percent quarter-on-quarter, the first time it has contracted since the first quarter of 2015, according to Reuters. It was also below an estimate for a 0.1 percent contraction.

More details have yet to be released, but the Economy Ministry said Germany had seen weak private consumption and strong imports in the third quarter which had a negative impact on foreign trade's contribution to growth, Reuters reported.

Germany's car industry, a key component of its export-related growth, is also seen to have struggled with new emissions standards following the "Dieselgate" cheating scandal that has rocked the sector in recent years.

German car production in September fell 24 percent from the same month a year before, data from the German Association of the Automotive Industry (VDA) showed. Meanwhile, new passenger car registrations came in at 200,100 — a decline of 31 percent over the same month in the year before.

German Economics Minister Peter Altmaier told CNBC Tuesday that he is not concerned about the economy, however.

"I'm not very much concerned because the third quarter was very much influenced specifically by the car manufacturing industries," he told CNBC's Annette Weisbach.

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"It is a difficult moment (but) all the international institutions, economic experts agree that Germany is still in good economic shape and that economic growth will continue to produce positive effects," he said.

First politics, now the economy

The weak data come amid headline grabbing news on the U.K. and the EU agreeing a draft Brexit agreement and Italy's decision to remain defiant over its budget despite Brussels' warnings for it to change its 2019 spending plans.

The data also come amid political uncertainty in Germany with a leadership race underway in the Christian Democratic Union (CDU) after Chancellor Angela Merkel said she would not run for the leadership again. She has also said she will leave office after 2021.

"First it was politics, now it is the economy," Carsten Brzeski, chief economist at ING Germany, said in a research note Wednesday.

"The worst economic performance since the first quarter of 2013 is another wake-up call for the euro zone's largest economy to take action," he said, adding that the data showed a mixture of one-off factors — like a knock to consumer confidence caused by Germany's poor performance in the World Cup soccer tournament — to more "worrying structural developments."

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"Problems with the emission norms created severe production problems in the automotive industry, higher energy prices completely erased previous wage increases and also don't underestimate the negative confidence effect from the World Cup," he said.

Brzeski predicted that the automotive sector should rebound in the coming months and that lower energy prices should revamp private consumption but "the poor export performance, despite a weak euro exchange rate, suggests that trade tensions and weaknesses in emerging markets could continue to weigh on Germany's growth performance."

The German government expects 2018 growth to be 1.8 percent, down from an initial 2.3 percent previously forecast, but Germany's central bank, the Bundesbank, expects growth to rebound in the final three months of the year.

Claudia Buch, the vice president of the Bundesbank, told CNBC's Julianna Tatelbaum Wednesday that Germany's economic issues were "really a temporary and very cyclical event and it's related to bottlenecks in the automotive sector."

President Donald Trump administration has delayed a decision on whether to impose tariffs on European car imports but the stay of execution might not last long. Altmaier said "we need open markets, we need multilateralism, we need lower tariffs not higher ones."

"We are in very intense negotiations with our American partners. We want to achieve a deal. A deal would be a very strong message worldwide that this escalation can be broken, and that free and open markets can have a future."

The Bundesbank's Buch conceded that a potential trade conflict with the U.S. needed to be mitigated against, however.

"The downside risks have increased … because German firms depend on the integration into global value chains and for that sense they would be very affected by a potential escalation of the trade conflict," she said.

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