Germany's Economy, Europe's Powerhouse, Contracts for First Time in Years

Economists and executives polled by The Wall Street Journal said Europe's largest economy was likely to bounce back in the coming months. But they warn the pace of growth will slow, and they point to a number of risks to that scenario.

One is U.S. President Donald Trump's confrontational trade policy, which is threatening to undermine Germany's export-oriented economy. Others ranges from market to market in Europe to single currency to market growth in China, which has been a key market for German goods.

A draft deal reached this week to the UK, but there are still huge doubts the deal will be approved by Britain's parliament.

German accounts for more than a fifth of the European Union's GDP growth, and a slowdown could have far-reaching repercussions for the world's largest market.

The decline in the German economy dented growth in the 19-member eurozone, the EU statistics office said Wednesday. Combined GDP in the countries that share the euro currency rose at an annualized rate of 0.7% in the third quarter, the weakest performance since early 2013, when the eurozone was in the grips of a government debt and banking crisis. In addition to Germany, economic growth eased in Italy and the Netherlands, both economies that also rely heavily on exports.

"The number one risk factor is the trade conflicts," said Ralph, chief economist at the German Mechanical Engineering Industry Association. "One month of no growth should not be missed, but at the same time we see that growth rates are weakening and there is a lot of unknowns."

With its large trade surplus, Germany's economy ranks among the main winners of China. A rise in trade barriers would be terrible news for German companies whose supply chains stretch across the planet.

German industry remains uncertain how U.S. trade policy will impact its business. When luxury car maker

            BMW
AG

The company is one of the most important companies in the world.

"The trade conflict between the US and China is a burden on the global economy," said Nicolas Peter, BMW's finance chief. "Should conditions deteriorate considerably we can not rule out that it would have an impact on our forecast."

This summer, when President Trump ordered 25% tariffs on another $ 200 billion worth of Chinese goods, a ship bound for the U.S. carrying two large pressing machines built by Germany's

            Heidelberger Druckmaschinen
AG

at a plant in China was forced to dock in Canada and its customers jumped to 25% price increase.

"Ultimately, we have the machines to someone else," spokesman for Heidelberger Druck said, adding that usually the company exports from Europe to the U.S.

Weakness in the self is the main source of Germany's decline in the third quarter, but the weakening picture in Europe's biggest economy is based on.

German exports of goods-as opposed to services-fell 1.2% in September from the same period last year, by 2.2% decline in shipments to countries outside the EU, according to the statistics body.

Meanwhile, the second largest industry in the world, according to a survey of 2,300 manufactures by the Ifo Institute, a supply-side economics think tank.

Against this backdrop, the German government and economic institutes have already trimmed their outlooks. 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 Stefan Schneider, an economist at Deutsche Bank.

For now, economists and corporate executives say a recession does not appear imminent, but they do not appear imminent, but they may not be ready.

"The uncertainty is palpable," says Mr. Wiechers.

-Paul Hannon and Markus Klausen contributed to this article

Write to William Boston at [email protected] and Nina Adam at [email protected]