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Shrinking German economy signals danger for global financial health

A sign in German warning us of an economic crisis
Illustration: Lazaro Gamio/Axios

The Dow's 800-point fall grabbed headlines, but the real warning about the global economy's dire health comes from Europe. The German economy shrank in the second quarter, showing negative growth for the second time in 4 quarters.

Why it matters: Germany is being decimated by the global downturn in manufacturing and trade that has weighed extensively on major exporting countries. The downturn is likely coming for other economies as well, experts say.

  • "Germany is a more export-oriented economy than even China, so in some respects it’s the canary in the coal mine," Milton Ezrati, chief economist at Vested and former economics head at asset manager Lord Abbett, told Axios.
  • "When people say the U.S. economy can’t continue to grow when the world is in recession, what’s happening in Germany is indicative of the fact that the world is in recession," Ezrati said.

The big picture: Germany is the largest economy in Europe and the growth engine of the broader eurozone economy. As such, it was not the only economy to show its suffering Wednesday.

  • The British economy also shrank in the second quarter, as did with Sweden, and the eurozone broadly grew just 0.2%, half its total from the first quarter.
  • China, the world's No. 1 trading nation, also is showing signs of stress. Its industrial output reading for July was the weakest in 17 years, and it reported much weaker-than-expected investment and retail sales numbers.

Be smart: In a global economy, “U.S. economic developments affect the rest of the world, and the reverse is also true,” Fed Chair Jerome Powell said last month.

Yes, but: Seema Shah, chief strategist at Principal Global Investors, predicts the downturn could be delayed until 2021.

  • “The U.S. economy is clearly weakening and risks are piling up. Capex will inevitably slow further, but under the assumption that the trade war doesn’t escalate further, it will not weaken so much as to tip the U.S. into recession," Shah wrote in a note to clients.
  • "The Fed pivot in early 2019, global central bank easing, China stimulus and the reversal of its deleveraging process will support the global economy," Shah said.

Where it stands: The 2 levers that have saved the economy in previous times of crisis look exhausted.

  • Central bankers have clearly gotten the message and are cutting interest rates at a level not seen since the financial crisis. However, studies show monetary policy is not as powerful as it once was.
  • The world is already deeply in debt and democratic institutions are extremely polarized, making government spending more difficult as well.