Germany Looks to Homegrown Support to Navigate Turbulent Times

The German economy will have to lean on homegrown support to put the brakes on a slowdown after its worst performance in five years.

Record-low unemployment, stronger wage gains and fiscal stimulus will underpin domestic demand after Europe’s growth engine stuttered in the second half of 2018, even though it avoided a recession. With export prospects deteriorating, those buffers will be needed to keep things humming along.

It’s not alone in seeing a slowdown, and weakening momentum around the world, particularly China, has investors and central bankers on edge. European Central Bank President Mario Draghi said Tuesday that global uncertainties “remain prominent.”

But even after Germany’s benchmark stock index posted its first annual drop in seven years and growth predictions were downgraded, many analysts are maintaining some optimism.

“The German economy seems to have reached a crossroads,” said Andreas Rees, chief German economist at UniCredit Bank in Frankfurt. “At year-end 2018, weaker demand and huge uncertainties started blowing strongly in the face of German exporters. However, there are also economic forces which act as some kind of a buffer.”

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According to Andreas Scheuerle, an economist at Dekabank in Frankfurt, the labor market offers a clear reason why the domestic economy will hold up: “Companies are desperately looking for skilled workers and scooping up who they can find,” which is good for incomes and consumption.

Growth in negotiated wages accelerated to 3 percent last year, the most since 2014, with most deals extending into 2019 or beyond. Still, bad news on the economy could make households’ more cautious. Consumer-spending growth slowed last year and the savings rate rose, a sign that Germans may be bracing for harder times ahead.

The outlook is more subdued for investment. Companies have scaled back plans after bottlenecks in the car industry following new emissions tests had repercussions for the broader economy — a reminder that sentiment can shift quickly if temporary setbacks reach critical mass.

With the auto issues largely resolved, some carmakers are looking to 2019 and a possible solution to the trade dispute between the U.S. and China. Both are critical markets for Germany’s auto industry, which accounts for 20 percent of total domestic industry revenue.

Daimler AG expects Mercedes-Benz to rake in record sales this year, though BMW AG has warned of hurdles that will reduce earnings this year.

Globally, the direction appears to be only one way. The World Bank cut its world growth forecast last week, China vehicle sales fell for the first time almost three decades, and a prolonged U.S. government shutdown could hurt the world’s largest economy.

For Germany, that leaves the focus on domestic pillars. After a surplus of 1.7 percent of GDP in 2018, the government will spend more than 150 billion euros on infrastructure and education over the next four years. In addition, changes to tax brackets and social-security contributions will put more money in consumers’ pockets.

German growth this year is forecast to ease to 1.4 percent from an estimated 1.5 percent in 2018, according to a Bloomberg survey. It’s performance has a huge bearing on the broader euro area. where the expansion is also expected to cool.

“We still have a lot of difficulty seeing what going to stop the downward momentum in the European economy,” Torsten Slok, chief economist at Deutsche Bank, said in a Bloomberg Television interview. “There are some reasons why the fundamentals on the domestic side are good, but the external forces — China, the trade war — are just not going away, at least not any time soon.”

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