After a relatively good start to the year, the German economy has gone in reverse gear. In the second quarter, seasonally adjusted GDP shrank by -0.1% q/q. A sharp decline in exports (-1.3% q/q) and a setback in construction investment (-1.0% q/q) proved sufficient to bring the German economy to its knees, despite continued positive consumption impulses (+0.2% q/q). In view of the subdued outlook for world trade and the German automotive industry coupled with lingering elevated political uncertainty around trade, Italy and Brexit, at best mini-growth rates can be expected in the coming quarters. It is particularly worrying that the weakness in industry is increasingly affecting domestic demand as suggested by leading indicators and sentiment surveys. After all, the German economy has so far been kept afloat primarily by private consumption and construction investment. Due to the very weak start to the third quarter, the risk of a recession is now at a high level.
