Skip to main content

The global economy has lost another engine.

Germany's gross domestic product expanded by a meagre 0.1 per cent in the second quarter, a startling drop from the 1.3-per-cent gain the world's No. 4 economy posted over the first three months of the year.

Germany had been a beacon of strength in the global recovery, emerging from the financial crisis as an exporting powerhouse, tapping demand in countries such as China and Brazil for its higher-end consumer goods and cutting-edge factory equipment.

Story continues below advertisement

Its economic and fiscal soundness has also propelled it into a leading role in the battle to save the euro zone. Germany is one of the largest contributors to the bailout funds that have been used to aid highly indebted EU countries such as Greece and Ireland – at some political cost to German Chancellor Angela Merkel, who met with French President Nicolas Sarkozy in Paris Tuesday to discuss further measures to stem the continent's debt crisis.

But not even the home base for such world-beating companies as Porsche, adidas AG and Bayer AG can stay ahead of the malaise that settled over the world economy in the first half of the year.

The earthquake and tsunami that triggered a human and economic disaster in Japan in March disrupted global trade, the foundation of Germany's economy. At the same time, Europe's sovereign-debt crisis flared anew, jolting consumer confidence and prompting severe cuts in government spending as policy makers sought to assuage nervous bond traders.

The loss of propulsion from Europe's largest economy helped cause economic growth in the 17-country euro zone to slow to 0.2 per cent in the April-June period from 0.8 per cent in the first quarter, new figures from the European Union's Luxembourg-based statistics agency showed Tuesday.

Financial markets slumped after the release of the European data, as traders came to the realization that the United States isn't the only major economy fighting to keep up momentum after enduring the worst financial meltdown since the Great Depression.

The U.S. economy all but stalled in the first half of the year, stirring up worries of a double-dip recession. Germany's growth rate in the second quarter was the weakest since a contraction in the first quarter of 2009. France's economy, the second-biggest in the euro area after Germany, was flat in the second quarter.

"The slowdown is not just a U.S. story," said Jimmy Jean, an economics strategist at Desjardins in Montreal. "The data indicate that this is the beginning of a weaker period of growth in Europe."

Story continues below advertisement

A return to recession in Europe seems unlikely at this stage.

Germany's first-quarter expansion was strong, and the country's unemployment rate remains low, while incomes are expanding. Nor is demand on the continent dead. Italy's economy, the third-largest in the euro zone, grew 0.3 per cent in the second quarter.

Also, a U.S. Federal Reserve report showed Tuesday that U.S. industrial production jumped by the most this year in July, led by manufacturing, suggesting the disruption to global supply lines caused by Japan's disaster is fading. That could be a boost for Europe, which saw euro zone exports plunge 4.7 per cent in June, compared with a 1.5-per-cent increase in May, according to a separate EU report released Tuesday.

However, economists predicted Germany and the euro zone would muddle through the rest of the year, dependent on a revival in global trade as budget cuts and higher interest rates crimp domestic growth.

Ms. Merkel and Mr. Sarkozy met Tuesday in Paris to signal their commitment to preserving the euro amid widespread doubt the currency union can withstand a debilitating buildup of debt.

Once an isolated issue involving Greece, bond traders this summer have pushed up borrowing costs throughout Europe, forcing countries ranging from Ireland to Italy to implement austerity programs that have caused social and political unrest.

Story continues below advertisement

Ms. Merkel and Mr. Sarkozy disappointed some investors by refusing calls to issue bonds backed by the euro zone, which would raise funds for troubled European members at lower rates than those countries can obtain currently. Instead, the leaders said they would press for closer euro-area economic co-operation, including tougher deficit rules.

Their emphasis on austerity, while pleasing to bondholders, will do little to boost economic growth in the short term. With the euro zone economy at stall speed in the second quarter, the lack of economic impulse in Europe will ensure that the U.S. has company as economists fret about a return to recession.

"Such weak growth is only going to make emerging from the current crisis even more difficult," Benjamin Reitzes, an economist at BMO Nesbitt Burns in Toronto, said in a note to clients. "It appears that Germany's ability to overcome debt worries, as it's been able to in the past, has faded."

Report an error Licensing Options
About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.