German Economy Outdoes Growth Projections in Q2 but Outlook Remains Bleak

The growth of the German economy decelerated during Q2, in addition to one of the key sentiment indicators plummeting for the fourth consecutive month. The largest economy in Europe could be heading for a tough time in the near future unless the Euro Zone crisis is resolved quickly.

At the same time, the rise in the Gross Domestic Product (GDP) of Germany during Q2 was 0.3%. This growth outdid the projections and was no doubt boosted by an increase in local consumption as well as exports to non-European nations. However, the growth has come down from its level in the first quarter, when it was 0.5%. This has led to the ZEW sentiment index taking a nosedive, falling almost 6 points from -25.5 to -19.6.

According to Commerzbank’s Joerg Kraemer, the GDP growth was a positive sign for the economy but he doesn’t see any good news emerging from the German economy in the foreseeable future. He further added that though the economy was sturdy, the Euro Zone crisis can cause it to contract during the summer. He also said that the global recession would impact Germany.
In case the fall in growth speed ups, the German workforce could have second thoughts about contributing to the Euro Zone bailouts. As of now, the labor market is in good shape as the rate of inflation is on the lower side and the pay scale has improved.
A public survey showed that over 60% of the people think that the economy is in a good position. The contributing factor to this sentiment is the low rate of unemployment, which is 6.8%. Yet, the situation points towards a reversal in the trend of falling unemployment which has gone on for six years.

Ironically, the same poll showed many people have a gloomy outlook for the German economy. 56% of the people who responded to the poll believe that the economy and company formation Germany will decline during the course of the year. Never before did so many people respond to the poll with such an outlook.

Threats to Economy on the Rise
Despite the fact that Germany has been one of the few economies in Europe to stay strong when the debt crisis reared its ugly head, the recent information available shows a fall in local and foreign orders and sales as well as the industrial output. Even the Economy Ministry has accepted the fact that the economy faces ‘significant risks’.
Bernd Hartmann of VP Bank remarked that Germany has not been able to detach itself from the crisis faced by the rest of the countries in the Euro Zone. This is why the Q3 projections are slightly pessimistic. With the German economy contracting, it would mean that the stronger pillar of the European growth is shaky.

The German economy has been relying on exports for growth over the past many years. The biggest consumers of German-made products have been countries in the Euro Zone and the European Union. However, the recession has reduced their import capabilities, directly impacting Germany. Even China, which receives around 7% of Germany’s exports, is decelerating.
Several economists hold the view that Q2 would be the last quarter in which the economy grows in the foreseeable future. Yet, only a few are predicting a lengthy slump. According to Marcel Fratzscher, the economy would contract in the second half of 2012 but rally and recover during the next year.

The economists also believe that the German economy is not growing enough to stop the impending recession in the Euro Zone. Aline Schuiling of ABN AMRO said that Germany alone does not have the strength to prevent the recession.
Following the flat-lining in Q1, the Euro Zone economy further shrunk by 0.2% during Q2. Still, people are hoping that the local consumption of German goods would be enough to prevent Germany from going into a lingering slump even though recent statistics don’t breed optimism.

It all comes down to how the policymakers’ enable the Euro Zone to get out of the debt crisis. Christian Schulz of Berenberg Bank remarked that the consumption will keep the economy stable during the slump. Yet, nothing can be said about the Euro Zone crisis with certainty and whether it can be managed.