Germany’s GDP falls; analysts say will do better in next quarter

A one-off blip or a sign that Germany, Europe’s growth engine, is headed for troubled times as the West’s standoff with Russia bites? That was the question being asked after it emerged that the German economy had shrunk more than expected in the second quarter of the year, adding to jitters about the impact of the Ukraine crisis and the sanctions imposed on Russia.

Germany’s GDP fell by 0.2 per cent in the quarter ending on June, after growing by 0.7 per cent in the first quarter, the Federal Statistical Office said on Thursday. While a more detailed analysis is set to be released at the start of September, the statistical office warned: “The German economy is losing momentum.” Further damaging confidence in the economy that contributes a quarter of the Euro Zone’s output were investor sentiment figures released the day before. According to ZEW, the Centre for European Economic Research investor sentiment fell to its lowest level since the end of 2012 in August, which the organisation attributed to “continued geopolitical tensions.”

Overstating the impact However, economists warned against overstating the impact of the Ukraine crisis on Germany. Christian Schulz, senior economist at Berenberg Bank in London pointed to the strong performance of Eastern European economies over the same period.

“If Russia were to blame you would expect them to do badly. I think a much larger factor was the mild winter.” Due to the mild winter, the normal spring recovery in the construction industry did not happen. He also notes that while investment confidence has been hit, consumer confidence has been rising steadily in the past months, helping more domestic focused sectors. “I expect Germany to expand in the third quarter,” he said. “There was an enormous drop in construction but to me it’s a one off because fundamentally the construction sector is healthy,” said Carsten Brzesksi, a senior economist at ING in Frankfurt. “I would expect it to turn around by the third quarter.”

He added that while trade and investment were a drag during the quarter, it was more likely because of sluggish growth in France (Germany’s largest trading partner) and Italy, rather than the Ukraine crisis taking its toll. Russia is Germany’s 11th largest trading partner (India is its 24th).

“German trade is very diversified which means that any crisis in the world is going to hit it but if there are green shoots anywhere Germany is going to benefit from that,” says Schulz.

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