German economy skids abruptly in third quarter

FRANKFURT–Germany’s economy slammed hard on the brakes in the third quarter, as car makers struggled to adjust to a new emissions-testing protocol and tussles over trade rules undermined exports.

Fresh data published Wednesday showed that Europe’s economic powerhouse registered its worst performance in five-and-a-half years, according to the Federal Statistical Office.

Gross domestic product–the broadest measure of goods and services produced in an economy–shrank at a quarterly clip of 0.2% which translates to an annualized rate of minus 0.8%, according to the office. That is the lowest rate since the first quarter of 2013, falling well short of U.S. third-quarter growth of 3.5% in annualized terms.

To be sure, Germany’s economy won’t fall of the cliff. Economists said that the weak result was largely caused by temporary factors, notably bottlenecks in the approval of passenger cars in the wake of the new WLTP emissions-testing protocol. Exceptionally low water levels at the Rhine river–a major transportation route for oil and other goods– depressed activity even further.

“In the fourth quarter, the German economy will grow again simply because car manufacturers are likely to gradually ramp up their production again,” said Commerzbank economist Ralph Solveen.

Illustrating carmakers’ recent struggle to shift to new standards, production of vehicles and parts dropped by more than 7% in the third quarter from the preceding period, according to the statistics body.

Nevertheless, Germany’s export-dependent economy has lost momentum compared with last year, when it registered 2.2% growth, as an intensifying trade spat between Washington and Beijing has dampened foreign demand.

“The headwinds in global trade have become rougher,” said Stefan Schneider, an economist at Deutsche Bank. That is a concern, because “in Germany, weak exports tend to hit investments with a relatively short time lag,” he said.

Germany’s statistics body said the decline in Germany’s gross domestic product in the third quarter was largely caused by developments in foreign trade, as exports dropped and imports rose from the second quarter.

Limiting future growth, export expectations in the manufacturing sector hit their lowest in almost two years in October, according to a survey of about 2,300 manufacturers by the Ifo Institute, a supply-side economics think tank.

The government’s council of economic experts now expects growth of just 1.6% this year compared with 2.3% projected previously. For 2019, they predict growth of 1.5%.

“Economic activity has clearly passed its peak,” said Mr. Schneider, who expects 1.3% growth in 2019.

Write to Nina Adam at [email protected]