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Germany nears recession and Chinese factories slow in trade war fallout

In ominous signs of the damage being done by the trade war between China and the United States, data released on Wednesday indicated that the German economy is hurtling toward recession and that growth at Chinese factories is slowing at a pace not seen in almost two decades.

Germany’s economy shrank 0.1 percent from April through June and it has been treading water for the past year, the government’s official statistics agency said. Deutsche Bank analysts predicted that the economy would continue to shrink in the current quarter, meeting the technical definition of a recession.

In China, factory output in July fell to its slowest pace in 17 years, according to government data. Although the Chinese economy posted trade figures that were stronger than expected last week, the industrial output figure was another sign that China’s overall growth rate continues to slow under the weight of Beijing’s trade war with the United States and the country’s debt problems.

It is not surprising that China and Germany are stumbling under the weight of the trade pressures. China is the world’s largest exporter of goods and services, just ahead of the United States, and Germany is No. 3. Both have been countries hit directly by President Trump’s tariffs, and more broadly by the disruption to the global economy that the trade conflict has caused.

Still, the fresh data helped drive down stock prices around Europe. The main stock indexes in Frankfurt, Paris and London were all down 1 percent or more in midday trading.

In the United States, the S&P 500 dropped more than 1.5 per cent in early trading. Yields on United States government bonds also fell, a signal that investors were lowering their expectations for growth. Bond yields, which drop as prices rise, have been tumbling since a recent escalation of the conflict pushed investors seeking a safe haven toward government bonds.

The troubles of Germany and China are a bad omen for the rest of the world, because of the outsize roles the countries play in global commerce.

Automobiles, Germany’s biggest export product, are a prime example of the collateral damage being done by the broader trade war. The German carmakers Volkswagen, Daimler and BMW all earn at least a third of their revenue in China, where auto sales have been slipping after years of explosive growth. One major factor in the slide is the barrage of trade threats that have unsettled Chinese consumers, discouraging them from buying big-ticket goods.

Germany’s economic performance was the worst of any eurozone country during the second quarter, separate data from the European Union statistics agency indicated.

That is an embarrassment for Germany, which has long lectured other countries on how to manage their economies. The slumping growth will probably increase calls for Chancellor Angela Merkel’s government to increase spending to stimulate the economy.

“Today’s GDP. report definitely marks the end of a golden decade for the German economy,” Carsten Brzeski, chief economist at ING Germany, said in a note to clients. “The pressure on the German government to act will increase.”

Source: Business Standard