Scope Ratings GmbH, says the 3.3% decline in industrial output from March to June this year raises the prospect that the German economy will stagnate in 2019. This leading European rating agency forecasts only 0.5% growth in 2019, followed by 1.7% in 2020. Meanwhile, German government bonds offer investors negative yields across the entire Bund curve reflecting the European Central Bank’s signals that it could loosen monetary policy next month and investors’ preference for safe-haven assets amid worries about global growth and trade tensions.
Germany (AAA/Stable) has been a growth engine for the euro area in recent years, but the global slowdown and escalating trade conflict between the US and China have put brakes on the economy’s export-dependent expansion. Further escalation of the trade conflict would increase the likelihood of a prolonged downturn. According to IMF projections, a US tariff of 25% imposed on auto and auto part imports could result in another 0.15% negative growth shock for the German economy, one third of which is related to how tightly German companies are integrated in global supply chains.
“Germany is far from experiencing a sustained recession, but recent figures on industrial output and business sentiment clearly show the economy’s vulnerability to increasing global protectionism,” Bernhard Bartels, Scope’s lead analyst for Germany, says. “The timing looks right for a degree of fiscal stimulus to help offset the weak global environment given Germany’s exceptionally strong public finances, and resulting fiscal space, combined with record-low negative interest rates, which imply that Germany would be paid by investors for its borrowings.“Germany has an investment gap of around 5% of GDP, according to IMF estimates. Back in 2009, the government was widely criticized for a lack of fiscal stimulus during the recession. The government’s favorable budgetary situation combined with an upcoming fresh monetary impulse from the ECB could be used to speed up needed public and private investments and raise the country’s long-run growth potential.”
Scope estimates the central government has room for fiscal expansionary policies equivalent to around 0.9% of GDP (around €30 bln) without breaching the statutory limit on borrowing – the so-called debt brake – which allows a maximum structural, rather than cyclical, deficit of 0.35% of GDP. Federal states are required to report fully balanced structural budgets from next year onwards. Compliance with the debt brake rule and upcoming regional elections are two major impediments to public investment in infrastructure, education, research, and digital technology needed over the longer run.
To comply with debt brake rule requirements at the sub-sovereign level, municipalities have cut investment in previous years. These cuts have led to a decline in municipal investment to 35% of overall public investment in 2018 from 40% in 2005.