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German fiscal expansion is unlikely despite concerns

Wednesday, August 21, 2019

Significance

The economy shrank by 0.1% quarter-on-quarter in April-June; further shrinking in the third quarter would mean a technical recession. Since growth is not likely to pick up much in the next two to three quarters, the economic outlook for Germany is gloomy, with potentially significant political consequences.

Impacts

  • Germany’s hard-line stance against ambitious euro-area reform is likely to become more entrenched.
  • The implications of a German slowdown for the EU-26 will increase the chances of the ECB using unconventional policy to add stimulus.
  • A recession is likely to have negative effects on Germany’s defence spending, despite US pressure on Berlin to contribute more towards NATO.
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