The German economy ground to a halt in the fourth quarter of last year.
For most economic observers, this was a startling development. Despite the never-ending economic crises wracking Europe, Germany seemed like a perpetual bright spot, steadily clocking in 2-to-2.5 percent real GDP growth since 2014. But in the last year, Germany’s growth nosedived and officially hit zero in 2018’s final months. If it falls any further, Europe’s biggest economy will be in recession territory.
The story of how this happened begins with a straightforward fact: Exports are nearly half the German economy.
Between 1970 and 1995, exports slowly rose from 15 percent to a little over 20 percent of Germany’s GDP. But from 1995 to today, its exports exploded by another 25 percentage points — and stood at more than 47 percent as of 2017.
An enormous portion of Germany’s workers and businesses rely on foreign consumers to buy their goods and services. In slightly more technical terms, roughly half the German economy relies on demand created in other countries — rather than on demand it creates itself — to keep humming. If those other economies stop providing that demand — either because their own economy tanks, or because they make a policy choice not to — Germany’s economy gets dragged down. And starting last year, that all happened on several fronts.
First there were President Trump’s steel tariffs, which cut into American demand for German steel products. Then there was the slowdown in China’s economy: The Asian behemoth only hit 6.6 percent GDP growth in 2018, its lowest level in roughly 30 years and one that’s still falling. Partially, that’s thanks to Trump once again and his ongoing trade war with the country. But the combination of China’s state-run hybrid capitalism, Beijing’s efforts to lift hundreds of millions of its citizens out of poverty, and the ongoing transition to a modern economy has left long-term structural challenges that are finally beginning to bite.
Germany had nowhere to turn. Outside of the U.S. and China, Europe was already a mess and most big developing economies were already struggling. Meanwhile, China is so big, and its domestic demand has such an outsized impact on the world, that when it slows down even a bit, everyone else tends to slow down too — including all the other countries that might buy German exports.
Thus, bad luck is the first part …read more
Source:: The Week – Business