German Economy Grows at Weakest Pace Since Crisis as Coronavirus Hit Looms

– The German economy will grow by 0.6% in 2019 after a soft finish.

– In the slowest expansion since 2013 given the weakness in exports.

– The consumer side of the economy also weakened at the end of the year.

– Annual growth in the last quarter was 0% and 0.3%.

– But the corona virus crisis is about to bite the wounded auto industry.

– China's No. 1 export destination for cars manufactured in Germany.

– And Hubei Province is an integral part of the auto supply chain.

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The German economy posted the slowest pace of growth since last year’s sovereign debt crisis and stalled in the last quarter, official data has confirmed, although the Chinese Coronavirus crisis threatens to further slow it down in the coming months.

The largest economy in Europe grew by only 0.6% in 2019, Destatis said on Friday, although the annualized quarterly growth rate was even weaker in the last quarter at just 0.3%. This makes 2019 the slowest German economic growth since 2013, the year immediately after the debt crisis that almost dissolved the euro zone.

This happened after the German economy came to a standstill in the last quarter and growth had dropped from 0.2% to 0%, so that GDP remained unchanged at the end of the year. Unfortunately, the export sector was a major driver of weakness, although the domestic side of the economy also weakened.

"Our graphic shows the shifts in demand that drive German GDP, "says Holger Schieding, chief economist at Berenberg, "When export growth stalled in late 2018 due to uncertainties in the trade war, Brexit risks, and a general slowdown in China, net exports were cut GDP Growth. In response to these external shocks, companies have reduced inventory levels sharply over the past year. "

Above: Berenberg graphic with industry contributions to German GDP in recent years.

German exports of goods and services declined in the last quarter. Destatis says while imports increased. This could have led to a GDP-reducing decline in "net trade" over the period, although markets will not know until the second and more detailed estimate is released next month.

Meanwhile, growth in household and government consumption slowed. Business investment in machinery and equipment plummeted as companies continued to put money into construction projects and other "property, plant and equipment".

The surprise in Germany increases the risk of Eurostat According to some economists, the first quarterly estimate of eurozone growth was downgraded from a preliminary 0.1% to 0% on Friday at 10:00 a.m. The Italian and French economies shrank in the last quarter, while Spain saw strong expansion.

"The key question with this data is whether the second quarterly GDP estimate for all of DC is slated for a downward correction today. We believe that is the case," said Claus Vistesen, chief economist at the Eurozone Pantheon Macroeconomics, "Growth in Germany has dropped to about zero in the last three quarters, more or less in line with the headlines. The January polls were optimistic, though still weak overall, but now the coronavirus is at risk."

Above: Pantheon Macroeconomics graph showing the correlation between the German composite PMI and real GDP growth.

It is significant for economic observers that Germany did not give an obvious boost by the Brexit agreement between the British Prime Minister Boris Johnson and the EU at the end of last year, nor by the "Phase 1 agreement", which has so far restricted the US trade war has received and China.

The October Brexit Agreement marked the beginning of a slow but steady elimination of impending Brexit risk for importers and exporters across Europe while the trade war, if only temporarily, ended to prevent additional damage to China's economy and one possible further avert cut in international trade.

The real problem for Germany and many other European economies, however, is that Friday's numbers refer only to a time when the Chinese economy was not affected by the corona virus, which since the beginning of January has turned large cities of millions of people into ghost cities ,

"The collapse of Chinese production will affect growth far beyond the borders of the Middle Kingdom," said Davide Oneglia, an economist TS Lombard, "China is targeting about 17% of total auto exports for the euro area average (EA). Motor vehicles are again the largest EA exporter to China (~ 17% of the total). We are not surprised to see these percentages increase if we look at Germany in isolation. "

Above: The problems in the EU automotive industry will strongly pull away from the GDP of the large economy in 2019. Source: TS Lombard.

The Chinese economy is now experiencing a sharp decline, at least in the first quarter, which could significantly slow GDP growth in 2020, even if coronavirus infection is brought under control over the period. And such a slowdown is likely to be bad news for Germany and the eurozone, which may have suffered more in the US-China trade war than either protagonist.

China is a major trading partner for all economies, but it is particularly important for the eurozone and the global auto industry. This is partly due to the fact that Chinese demand accounts for around 30% of the world market, while the four large countries in the Eurozone have a similarly large share in the supply.

The number of new infections reported by the Chinese authorities appears to have increased in the past few days. On Friday, 5,090 additional cases and a further 121 deaths were confirmed. This is after another 15,152 new confirmed cases with 254 new deaths were announced on Thursday.

"Hubei, where the epidemic started, is a major center of the auto industry. While factories are regularly closed for Chinese New Year, the protracted closure of the province has put pressure on the long supply chains in the automotive sector. Some of the largest global automakers have issued warnings their ability to continue production in Europe if the situation persists by the end of the month. We currently estimate capacity utilization in China at 30%, "said Oneglia.

Above: Share of the Chinese and the Eurozone in global automotive supply and demand. Source: TS Lombard.

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