Germany flies into ‘perfect storm’ as economy heads towards recession — live updates

Europe’s largest economy contracted in the second quarter - BloombergEurope’s largest economy contracted in the second quarter - Bloomberg
Europe’s largest economy contracted in the second quarter – Bloomberg

Germany’s economy is halfway to recession, after shrinking in the three months to June as global tensions put pressure on its export-driven manufacturing sector.

Europe’s largest economy contracted by 0.1pc in the second quarter, following what state statistical office Destatis called “a slight decline in economic performance”.

Over the past year, Germany’s economy grew by just 0.4pc, its worst performance in years. A closely-watched survey of investors yesterday found German economic sentiment had plummeted to its lowest level since the Eurozone crisis in 2011.

Speaking before the widely-anticipated fall was published, Chancellor Angela Merkel said Germany’s economy was entering a “difficult phase,” adding: “We will react depending on the situation.”

If the German economy declines again between July and September — the third quarter — it will be seen as having entered a technical recession, which it narrowly avoided last year.

European stock markets opened in the red this morning, with Germany’s DAX down around 0.4pc. The continent’s top indices had rallied yesterday after the US announced it would delay tariffs on around $150bn of Chinese exports, easing fears of an impending trade war.

9:30AM

Breaking: UK inflation figures released

  • CPI year-on-year: 2.1pc (prior 2.0pc, est: 1.9pc)
  • CPI core year-on-year: 1.8pc (prior: 1.8pc, est: 1.8pc)
  • July CPI: –0.1pc (June: 0pc, est: –0.1pc)
  • RPI year-on-year: 2.8pc (prior: 2.9pc, est: 2.8pc)
  • July RPI: 0pc (June: 0.1pc, est: 0pc)

9:20AM

Coming up: Rail passengers prepare for ‘annual kick in the teeth’

Rail - Credit:  Paul Grover for the TelegraphRail - Credit:  Paul Grover for the Telegraph
A Southern Rail train Credit:  Paul Grover for the Telegraph

In about 10 minutes, we’ll get the UK’s latest inflation figures, which comes in two broad flavours: Consumer Price Index (CPI) and Retail Price Index (RPI). A lower-than-expected figure for CPI is likely to have an impact on the pound (currently having a flat day). CMC Markets’ Michael Hewson explains:

In June the headline CPI came in on the Bank of England’s target rate of 2pc, and could well slip back to 1.9pc, which would mean that real wages are rising at 2pc per annum, though with RPI at 2.9pc it sounds better than it is. Core prices are also set to slide as well, down to 1.8pc.

Given all the doom and gloom surrounding Brexit, and concerns about job losses, this is welcome news, though how long it will last remains to be seen.

For many people, however, RPI is the figures to watch. That’s because it is the number used to calculate how much rail fairs rise by. My colleague Oliver Gill writes this morning:

Consumer groups will be up in arms. Unions will once again hold this up as a banner of how private capital fails. There’ll be a steady stream of figureheads demanding change and saying enough is enough.

In one sense, it’s absolutely bonkers that train price increases are linked to the retail price index (RPI). This higher rate hasn’t been this country’s official measure for more than eight years. Not for the first time, the railways are open to criticism of being gravely behind the times.

Linking fares to the consumer price index (CPI) instead would give passengers some reprieve. Roughly speaking, using it would save a tenner on the price of a £1,000 season ticket. The problem is, such a change upsets a delicate financial equilibrium.

9:07AM

‘Perfect time’ for Germany to ramp up investment

The German government is facing increased calls to ramp up spending to stimulate economic growth following this morning’s GDP figures. Matthias Weber, an economist at the University of St. Gallen in Switzerland, says:

While the industrial sector is already in recession, the service sector is currently still doing fine but will likely follow soon. Given the current economic situation at the beginning of a recession, now would be the perfect time for Germany to support the economy by investing in its future. Public investments in railways, roads, bridges, childcare centers, public schools, and renewable energy are much needed. Such investments could currently be made at an extremely low (even negative) interest rate and they would boost the slowing aggregate demand.

The second-quarter contraction put further pressure on German bond yields as investors continue to move towards safe-haven assets.

8:58AM

National Grid boss: Government must probe why railways and hospitals lost power during blackouts

Blackout - Credit:  Lewis Pennock/PABlackout - Credit:  Lewis Pennock/PA
People wait outside King’s Cross during last Friday’s blackout Credit:  Lewis Pennock/PA

National Grid boss John Pettigrew has said the government must look into why power was cut to critical bits of infrastructure including hospitals and railways during the blackout last week.

Speaking to the Financial Times, Mr Pettigrew said National Grid had restored power quickly, and said problems had been caused a a local network level.

He told the paper:

The network was back and in normal operation within seven minutes but the disruption was massive, so it’s absolutely critical we look at the prioritisation of demand.

8:45AM

Round-up: Government urges no-deal preparation, FirstGroup wins West Coast and HS2 franchises

Michael Gove - Credit: Heathcliff O'MalleyMichael Gove - Credit: Heathcliff O'Malley
Michael Gove is in charge of preparations for a no-deal Brexit Credit: Heathcliff O’Malley

Two big stories from this morning:

8:25AM

Merkel: ‘We’re heading into a difficult phase’ — re-cap

Merkel AKK - Credit: Markus Schreiber/ APMerkel AKK - Credit: Markus Schreiber/ AP
Angela Merkel (right) with defence minister and heir apparent Annegret Kramp-Karrenbauer Credit: Markus Schreiber/ AP

It was Angela Merkel’s first day back from her summer holidays on Monday, and the German Chancellor must have known she was returning to bad news. 

Today’s figures showed an expected 0.1pc second-quarter GDP contraction in Europe’s largest economy, as the export-heavy nation struggles with global disruption.

At a town hall yesterday, Ms Merkel was pushed on the state of Germany’s economy.

“It’s true, we’re heading into a difficult phase,” she said, adding of today’s figures: “We will react depending on the situation.”

“Domestic demand is still somewhat propping up the economy,” the outgoing Chancellor added.

Germany published its draft budget yesterday, which maintained a policy of not increasing net debt: suggesting the plan isn’t to spend its way to growth. 

If the German economy is on its way to a recession, that will be confirmed in November. Sorting out the country’s economic issues, however, may ultimately fall to Ms Merkel’s successor. The Chancellor reiterated yesterday that she will not seek public office again after she steps down in 2021.

8:11AM

ING: ‘The end of a golden decade for Germany’

German industry - Credit: Ralph Orlowski/REUTERSGerman industry - Credit: Ralph Orlowski/REUTERS
Is it time for a shake-up in German industry? Credit: Ralph Orlowski/REUTERS

ING economist Carsten Brzeski has assessed this morning’s GDP figures, and what kind of action they may prompt from Germany’s government and the European Central Bank, which last month hinted that it was preparing a package of measures to help stimulate the economy. He writes:

Today’s GDP report definitely marks the end of a golden decade for the German economy. Since the end of the 2008/09 recession, the economy has grown by an average of 0.5pc [quarter on quarter]every quarter. In fact, the economy grew in 35 out of the last 40 quarters. However, under the surface of these impressive headline numbers, a worrisome trend has emerged. Since 3Q 2018, the economy has been in a de facto stagnation, with quarterly GDP growth at an average of zero percent…

…There is no need to panic, but instead to act. Looking ahead, the future path of the German economy highly depends on external events and government action. Obviously, any relief in the ongoing trade conflicts would benefit the German economy. Companies could still use extremely favourable financing conditions and invest. However, the principle of hope is not enough. The pressure on the German government to act will increase.

Mr Brzeski said Europe’s largest economy now needs a stimulus package aimed at “digitisation, climate protection, energy transition, infrastructure and education”. 

Markets.com’s Neil Wilson added:

The export heavy economy is suffering as global trade contracts. Unless maybe Merkel and co can shake off their dogma — it’s only been a hundred years since hyperinflation.

7:56AM

Final details on second quarter will reveal reasons underpinning contraction

Claus Vistesen, from Pantheon Macroeconomics, says the data is “Not pretty, but slightly better than we had feared based on the monthly data.” He adds:

This information is of very little use, though, until we see the final breakdown between investment and inventories. Looking ahead, early Q3 sentiment data suggest that the economy remains weak. The risk of a recession is now elevated, but indicators for domestic private demand remain relatively resilient, especially in the services sector and with respect to consumers’ spending. By contrast, leading indicators for manufacturing and construction suggest that investment is slowing, and today’s data suggest that the final Q2 details will confirm this. 

It’s worth remembering that today’s data follows a mega slump in German investor confidence, as revealed yesterday by research group ZEW. Here’s our full report on that data:

7:33AM

‘Door is wide open to a German recession’

The mood in Germany is not great. Here’s what Klaus Borger, an economist at public investment bank KfW, has said about the GDP figures:

With the escalating trade conflicts of the USA, the ever more probable chaos (of) Brexit and the weaker world economy, the perfect storm has been brewing since the summer of last year. The door at least to a technical recession… is wide open.

Germany’s most important export, cars, have driven the decline in its ailing manufacturing sector, but it’s not the only issue facing the country. My colleague Tom Rees had examined the four key problems facing the stumbling German economy:

7:16AM

German contraction, train ticket hike and trade wars

Volkswagen - Credit: FILIP SINGER/ EPAVolkswagen - Credit: FILIP SINGER/ EPA
A Volkswagen factory worker Credit: FILIP SINGER/ EPA

Good morning. The big news out this morning is that fears have increased that Germany is heading for a recession after suffering a 0.1pc contraction in its economy in the second quarter of the year.

The shrinkage means Germany is now lagging the other largest economies in the eurozone, after the second quarter saw Italy flatline and France grow 0.2 percent.

As hard data and soft indicators such as surveys of business, investor and consumer sentiment have eroded in recent weeks and months, economists have warned Europe’s powerhouse could suffer falling output and even a technical recession — two successive quarters of negative growth.

Federal statistics authority Destatis said higher spending by private households and the state as well as increased investments helped support the economy at home.

But “foreign trade developments braked economic growth, since exports fell back more sharply than imports compared with the previous quarter,” the statisticians added.

Elsewhere, markets may be pushed higher today after President Donald Trump delayed tariffs on some Chinese goods, including laptops and mobile phones, until December 15. 

The reprieve came after a call between US trade representative Robert Lighthizer and Chinese vice-premier Liu He ahead of tariffs that would have hit $300bn (£249bn) of imports from China on September 1. The two sides plan more talks in the next two weeks, according to Chinese state-run media.

5 things to start your day

1) Confidence in the German economy has crashed to its lowest level since the depths of the eurozone debt crisis, fuelling fears of a recession.

2) Fears are growing that the jobs miracle could be close to its end as unemployment edged up in June, the number of vacancies slid and productivity took its biggest plunge since 2013

3) Today we’ll find out how much more a train ticket will cost next year. Inflation figures released later will be used by the rail industry to calculate January’s rises.

4) Hong Kong protests heated up for a second day yesterdayand will be in focus again today as one of Asia’s key transport hub remains closed.  US senator Ben Cardin warned late last night that Hong Kong could lose the special trade status it has enjoyed under US law if Beijing intervenes directly.

5) Marshall Motors chief executive Daksh Gupta has said that buying a car would not only become more expensive in the event of a no-deal Brexit, but motorists could have a smaller range of vehicles to choose from. “If we don’t get a deal and sterling falls then Britain will become a much less attractive market and less profitable market for manufacturers,” he said. “We’ll probably see fewer cars coming into the UK.” 

What happened overnight

Asian equities rallied on Wednesday as investors breathed a collective sigh of relief at news the US had delayed tariffs on a swathe of Chinese goods, easing tensions in the countries’ bitter trade war.

The news provided some much-needed respite for investors, who have come under intense pressure from a range of issues including concerns about the global economy, Hong Kong’s protests, the trade war and Brexit.

Wall Street’s three main indexes surged on the announcement with the tech-rich Nasdaq up 2pc, and the Dow and S&P 500 more than 1pc higher.

The US gains filtered through to Asia where Hong Kong climbed 0.5 percent.

Elsewhere the surge in US stocks lifted MSCI’s broadest index of Asia-Pacific shares outside Japan by 0.9pc.

The Shanghai Composite Index advanced 0.6pc while South Korea’s KOSPI advanced 0.8% and Japan’s Nikkei rose 0.6pc.

High-yielding, riskier currencies also enjoyed some gains with the Mexican peso and South African rand more than one percent higher, South Korea’s won gaining 0.8 percent and the Indonesian rupiah 0.6 percent up.

China’s yuan, which has plunged in the past two weeks on worries about the trade stand-off — sparking accusations Beijing is a currency manipulator — also bounced.

Coming up today

Analysts are expecting low-single-digit growth in Prudential’s results for the first half of the year. That’s not the main event — front and centre on Wednesday will be extra details on its plans to demerge its asset management operation (M&G Prudential) and its plans for Brexit.

Also reporting is builder Balfour Beatty, which has undergone a major restructuring in the wake of outsourcing giant Carillion’s sudden collapse. In March, the company announced it has increased profit despite a fall in revenue, and has said that it is aiming at “higher quality” work. Its shares have been feeling the pressure however.

Interim results: Admiral, Apax Global Alpha, Avast, Awilco Drilling, Balfour Beatty, CLS Holdings, Hochschild Mining, Lookers, Prudential, Riverstone Energy, Zeal Network

Economics: Inflation figures (UK), Sentiment, industrial production, employment and GDP (all Eurozone)

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