After an economic contraction in the second quarter, there are fears that Germany may be headed towards a recession, although the government believes such weakness is short-lived.

Pressure is mounting on Germany to increase public spending and abandon next year’s economic goal of a balanced budget for the first time since 1969, but Angela Merkel’s government believes growth will soon pick up again. International tensions, a weak Eurozone and slow domestic demand shrank the GDP of Europe’s economic engine by 0.2 per cent in the second quarter.

GDP growth rates for this year and the next have currently been forecast at 1.2 and 1.3 per cent, down from earlier predictions of 1.8 per cent and 2 per cent respectively.

Vice-Chancellor and Economy Minister Sigmar Gabriel, who announced the new figures, insisted that the country was not headed into a recession, Reuters reported. “I can’t think of any argument to say Germany is in recession or that we need to abandon our debt plans,” he said, referring to the government’s target of a balanced budget next year with no new debt.

The policy, dubbed schwarze null or black zero, has come under criticism, both from coalition partners such as Deputy Labour Minister Joerg Asmussen and from external agencies, who are calling for Germany to divert its large current account surplus into renewing its creaking infrastructure. Eurozone partners France and Italy fear that a continuation of fiscal reforms will lead to Japanese-style stagnation in the 18-member bloc.

The International Monetary Fund (IMF) called for more investment in growth-enhancing projects earlier this month. “Germany, which has completed its fiscal consolidation, could afford to finance much-needed public investment in infrastructure primarily for maintenance and modernisation, without violating fiscal rules,” it said in a statement.

The German Institute for Economic Research (DIW Berlin), a think tank, also criticised the government’s policy. “The black zero is a fatal signal for German firms and European neighbours,” Marcel Fratzscher, President of DIW Berlin was quoted as saying by the DPA news agency. “If the economy continues to weaken, the goal will no longer be sustainable.” He added, “This is a situation when the state should jump in. The federal government could invest ¤15-20 billion (about Dh69-92 billion), without breaching the debt ceiling.”

Bad news

Germany has grown to become the strongest economy in Europe since its unification in 1990 and has been the exception to the weakness plaguing Europe in recent years. However, data released in October signalled that the country could soon be in recession, which economists define as two consecutive quarters of falling GDP.

Industrial output plunged 4 per cent in August as compared to an expected 1.5 per cent decline, while factory orders dropped 5.7 per cent in the same month. Both were the biggest falls since 2009.

Investors also appear worried. Economic sentiment fell to -3.6 in October, dropping below zero for the first time in two years, according to a monthly index tracked by the ZEW think tank, suggesting that investors expect the economy to further weaken over the medium term.

Some experts want Germany to redirect proposed improvements in pension benefits to public spending. As of July, workers who have made social security payments for 45 years will be able to retire on a full pension at 63, which is two years earlier than currently.

“After lecturing everybody else about the absence of fiscal responsibility, a cut in the German retirement age seems just a touch odd,” HSBC bank Group Chief Economist Stephen King tweeted recently. However, Finance Minister Wolfgang Schaeuble believes the country is on the path to growth thanks to sound economic fundamentals.

High consumption

“Germany’s economy is overall in good shape,” he said in an IMF meeting in Washington last month, and described the momentum as positive.

“Domestic demand remains to be the main driver of economic growth. In particular, the consumption of households is going to expand steadily. This is underpinned by the elevated level of consumer sentiment as a result of the favourable devleopment of real disposable income, which is supported by low inflation and increasing levels of wages and employment. Non-wage income is also going to expand. Housing investment may also continue its upward trend, although at a slower pace than in the recent past. In the absence of major adverse shocks, business investment is expected to continue its modest recovery. Germany’s favourable economic situation is supported by a sound, trust-building and growth-friendly fiscal policy,” he said.

He may not be that far off the mark.Analysts are cheered by a set of economic indicators released at the end of last month. Unexpectedly, unemployment for the month fell as the market shrugged off cooling economic conditions all around, AFP reported, quoting data from the Federal Labour Office. The unemployment rate was steady at 6.7 per cent in seasonally adjusted terms.

“Headline data from Germany’s buoyant labour market gives little indication that the economic rough patch is having an impact on jobs,” says Berenberg Senior Economist Christian Schulz. But he warned the economy was not out of the woods yet. “The job market may not escape the investment slowdown entirely unscathed, especially with the introduction of the national minimum wage in January, which will increasingly play a crucial role in most companies’ hiring decisions.” he says.

Economist Johannes Gareis of the investment banking company Natixis says the new data “suggests that the German job market remains resilient like a rock, despite the cooling of the economy”.

He adds, “This is evidence in itself that the German economy should avert falling back into a period of recession. The solid performance of the German labour market over the course of this year should further support household income as well as private consumption, thereby bolstering growth in the foreseeable future.”