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As Ukraine Reverberates, German Economy Shrinks, Diminishing European Outlook

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Germany's economy slowed sharply in the second quarter, crimping activity in export centers such as the harbor in Hamburg, Germany's largest.
  • Why it matters

    Why it matters

    Germany’s economy, which contracted in the second quarter, has the potential to slow European growth.

  • Facts

    Facts

    • Germany’s economy shrank by 0.2 percent in the second quarter after growing 0.7 per cent in the first three months.
    • The euro zone stagnated in the April-June period. Italy shrank 0.2 per cent and only Cyprus performed worse than Germany.
    • Some economists believe Germany could now be in a recession, but most still expect it to rebound in the second half of the year.
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    Audio

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Germany recovered quickly from the global financial and euro zone currency crises to become the reliable economic powerhouse of Europe, a model student delivering solid growth as its neighbors suffered under high public debt and their inability to tackle structural problems holding back growth.

That well-worn storyline was turned on its head Thursday, with news that the German economy shrank by 0.2 percent in April through June after increasing 0.7 percent in the first quarter. Some economists are now predicting Germany may even be in a mild recession, a startling turn partly to blame on the crisis between Russia, the West and Ukraine.

“The German economy may already have fallen into a mild recession because of the crisis,” said Ferdinand Fichtner, the chief economist of the Berlin-based economic institute DIW.

If Mr. Fichtner is correct, the German economy has continued shrinking over the summer. To be sure, unemployment in Europe’s largest economy is still low — at 5.1 percent in June, even less than in the United States — and consumers continue to spend while wages are set to rise.

But companies inside and outside of Germany, spooked by a series of geopolitical crises ranging from Ukraine to the Middle East, are clearly holding back on investments, Mr. Fichtner said.

The second-quarter GDP report has turned Germany from the best to worst performer in the 18-nation euro zone currency area in just three months. Italy shrank at the same rate as Germany in the second quarter and only Cyprus performed worse, contracting 0.3 percent, according to the European statistics agency Eurostat.

The 28-country European Union as a whole grew by 0.2 per cent.

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