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Clouds Now Gathering Over German Economy

One strong pillar of the German economy is strong domestic demand, buoyed by unemployment at its lowest levels since the country’s reunification in 1990, rising wages and higher public spending. But there, too, politics could threaten growth
Shares in German and other European car manufacturers fell on Friday after Trump threatened  to impose a 20% tariff on cars imported from the bloc.Shares in German and other European car manufacturers fell on Friday after Trump threatened  to impose a 20% tariff on cars imported from the bloc.

An industrial powerhouse built on massive exports and a gigantic car industry, Germany is among the nations most sensitive to mounting trade tensions between the United States and other major economies.

US President Donald Trump has in recent weeks struck his first tariff blows at the European Union and China, who both vowed retaliation—risking a tit-for-tat trade conflict on two fronts that could weigh on the global economy, AFP reported.

"Germany's second economic miracle is over," influential daily Die Welt wrote this week, comparing the years of steady growth since the financial crisis to the post-World War II reconstruction period.

Two respected economic think-tanks sharply lowered their growth forecasts, with Berlin-based DIW cutting its prognosis for this year by half a percentage point to 1.9%, and then again to 1.7% for next year. Munich's Ifo institute was even more drastic, slashing its forecast to 1.8% for 2018 from 2.6% previously.

At a company level, Mercedes-Benz maker Daimler was the first among Germany's auto industry titans to lower its profit forecasts this week, prompting business daily Handelsblatt to declare the "end of the party" for the sector and its 800,000 workers. High-end competitor BMW says it is following the international situation "more closely than ever".

BMW and Daimler are especially vulnerable, as they face both the threat of US tariffs on their cars and parts shipped from Europe, as well as taxes at the Chinese border on the vehicles they build at massive plants in America.

Meanwhile, Germany's powerful chemical industry federation said last month it is "less optimistic" for this year given the hardening trade rhetoric.

Stumbling Start

"Clouds are gathering over the German economy," whose industrial engine "began sputtering at the start of the year," said Ifo macroeconomics chief, Timo Wollmershaeuser. Growth slowed to 0.3% between January and March, half the rate recorded in the previous quarter.

Initially, there were suggestions that short-term factors—such as a winter flu outbreak, a calendar packed with public holidays and a wave of industrial disputes—might have been to blame. But weak economic data in April put paid to such arguments.

Both industrial production and industrial orders—indicators of future economic performance—fell, presaging belt-tightening in the months ahead. "American economic policy is at least partly responsible" for the slowdown, Wollmershaeuser said.

In purely financial terms, there is little risk to Germany from Trump's first move against Europe, tariffs on steel and aluminum imports—25% on steel and 10% on aluminum which took effect on June 1.

The border duties are expected to knock just €37 million ($43 million) off a gross domestic product totaling €3.3 trillion.

Uncertainty Bites

But investments and exports—exactly the elements that powered Germany's expansion last year—are already suffering from "heightened uncertainty", said DIW economist Ferdinand Fichtner. Many German companies manufacture capital goods such as machine tools that are exported all around the world.

That means when foreign companies decide to delay investment in their plants, German manufacturers' sales slip. Present trade fears are only a foretaste of what might happen if the US makes good on its threat to tax European car imports.

The move would inflict a five-billion-euro blow on the German economy, or 0.16% of GDP, Ifo calculated. If China also levies taxes on imports of US cars, Daimler and BMW—the two biggest exporters of cars from America—could face plunging sales there too.

One strong pillar of the German economy is strong domestic demand, buoyed by unemployment at its lowest levels since the country's reunification in 1990, rising wages and higher public spending, the economists note. But there, too, politics could threaten growth.

Car Shares Skid

Shares in German and other European car manufacturers fell on Friday after Trump threatened to impose a 20% tariff on cars imported from the bloc, traders said, dpa reported.

In Germany, BMW was down around 2% while Daimler and Volkswagen both dropped by more than 1%.

European auto stocks had already come under pressure in recent days on expectations that Trump would seek to hit the sector with tariffs in response to retaliatory tariffs by Brussels which kicked in on Friday.

Elsewhere in Europe, Fiat Chrysler shares lost more than 3% in Milan while shares in French carmakers Renault—which does not sell cars in the US—and Peugeot were also weaker, but only marginally.

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