Germany is about to reveal just how vulnerable it might be to a weakening Chinese economy that is sparking a rout in global markets.
A second reading of German gross domestic product on Tuesday will show overseas sales led the second quarter’s 0.4 percent expansion. The same day, a survey of business leaders may signal that confidence is fading as China’s slowdown and currency devaluation cast a cloud over the world’s economy.
German exporters face the risk that China, their third-biggest trading partner, will curtail purchases of foreign goods after its Aug. 11 decision to weaken the yuan. With the euro-area recovery still sluggish and fragile, that puts the onus on domestic activity to keep Europe’s largest economy expanding.
“There are quite a few headwinds for the German economy, from China, but also because the consumption-driven recovery can’t last for long,” said Natascha Gewaltig, director of European economics at Action Economics U.K. Ltd. in London. “China and the slowdown in the world economy will definitely have an impact.”
Chinese stocks plunged the most since 2007 on Monday as government support measures failed to allay investor concerns that the economy will worsen, with the Shanghai Composite Index tumbling 8.5 percent. Germany’s DAX Index was down 2.7 percent and the Stoxx Europe 600 Index was 3.2 percent lower at 10:53 a.m. Frankfurt time.
German factory growth accelerated to the fastest pace in more than a year this month, Markit Economics said on Friday. Even so, the Ifo institute’s business climate index will probably fall to 107.6, according to a Bloomberg survey of economists, highlighting the risks to the upswing. The gauge unexpectedly rose to 108 in July as tensions related to the Greek debt crisis eased.
Those risks include China, which is growing at its slowest pace since 1990 and where the government is letting the market have a larger say in setting the yuan’s exchange rate.
Chinese demand has been key for German manufacturing in recent years, and the trade deficit with China fell to the lowest this century in 2014. However, the gap has widened this year and the first-half figure was 50 percent bigger than the 2014 total.
Luca de Meo, sales chief at Volkswagen AG’s Audi unit, said this month that the market in China “has remained challenging as expected, exacerbated by the stock market turmoil.”
Second-quarter GDP data “will reflect relatively little of the global weaknesses we have observed,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. But the “longer the weakness remains in emerging markets, the more dangerous it will be, since German companies, compared to the rest of Europe, are particularly active in emerging markets.”
An emerging-market slowdown may not spell doom for Germany’s recovery. Growth elsewhere, including an upswing in the U.S., helped to swell the overall trade surplus to 24 billion euros surplus in June, the highest since 1990.
Domestic demand is also playing a larger part in the expansion, helped by near stagnant prices, rising wages and record-low unemployment. Details of those components in second-quarter GDP will be revealed on Tuesday.
“Exports may benefit from the continuing recovery in the euro area,” the Bundesbank said in its monthly report on Aug. 17. “Domestic demand components will feature more prominently in the second half.”
The German economy, along with the 19-nation euro region, is also getting a boost from the renewed decline in oil prices. Data on Friday will probably show that German prices barely rose in August. The Bundesbank forecasts inflation of just 0.5 percent this year.
“There are risks, no doubt, and the risk from global growth is one,” said Antonio Garcia Pascual, an economist at Barclays Plc in London. “But for Germany, with growth above potential, with domestic demand doing okay, the fact that the euro is weak and is helping the largest exporter, the outlook is strong.”