August 14, 2019 / 10:25 AM / 2 months ago

Breakingviews - German weakness gives ECB carte blanche to be bold

German Bundesbank President Jens Weidmann talks to European Central Bank (ECB) President Mario Draghi after G-20 finance ministers and central banks governors family photo during the IMF/World Bank spring meeting in Washington, U.S., April 20, 2018.

LONDON (Reuters Breakingviews) - European Central Bank President Mario Draghi has just been given a free pass to be bold. It comes from Germany’s statistics office, which said on Wednesday that Europe’s largest economy contracted in the second quarter. The development will lessen any Teutonic resistance to the monetary easing that Draghi is planning.

German GDP shrank 0.1% between April and June compared with the previous three months. The fall was unsurprising after a slew of weak economic reports. International trade tensions and slowing global growth are taking their toll on the country’s export-orientated manufacturing sector. The decline was held in check by the resilience of household consumption. But manufacturing’s problems may spread.

The service sector expanded at its slowest pace in six months in July and companies expressed concern about prospects for economic growth and about the auto sector, a purchasing managers’ survey showed on Aug. 5.

True, the German unemployment rate is a mere 5%, just a whisker above the record low reached earlier this year. But the pace of job creation has slowed and consumer morale is weakening. The GfK consumer sentiment indicator has fallen for three months in a row. It is now at its lowest since April 2017, according to a report published last month.

Germany could easily increase government spending to counter any consumer weakness. After all, the European Commission in May forecast that the country would run a budget surplus of 1% of GDP this year. However, as recently as Tuesday, Chancellor Angela Merkel said she saw no reason for more fiscal stimulus.

Frankfurt’s monetary policy is likely to offer some compensation for Berlin’s fiscal restraint. Draghi has dropped such broad hints, including after the central bank’s July policy meeting, that investors are expecting such easing in September.

In the past, Deutsche Bundesbank President Jens Weidmann has rejected looser monetary policy and parts of the German public have baulked at sub-zero policy interest rates. The former has already softened his stance and the latest weakness may make the latter more accepting of ECB stimulus. Draghi, who steps down at the end of October, can leave on an audacious note.

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