Germany's Economy Catches the Euro Flu

While much of the rest of the euro area is in recession or close to it, Germany has managed to keep growing as painful labor market reforms in the early 2000s boosted productivity and restrained wage growth. With help from a weak euro, Germany has offset weak demand from the euro region with exports to emerging markets, especially China, which values German-built trains, power equipment, and machine tools.

Yet the crisis is catching up with Europe’s top economy. Business confidence fell to its lowest level in more than two years in June amid speculation about Greece leaving the euro and Spain’s banking woes. The latest data show growth slowing as austerity measures across the region curb Europe’s demand for German-made cars, machinery, and more. A survey of purchasing managers published June 21 shows German manufacturing shrinking at the fastest pace in three years. German retail sales unexpectedly fell for a second month in May. Unemployment climbed in June for the fourth month this year. “The German economy is clearly slowing down, and a contraction in the second quarter looks possible,” says Carsten Brzeski, senior European economist at ING Group in Brussels. While Germany is in better shape than its peers, “the most solid ship can capsize in a rough thunderstorm.”