Germany’s economy shrank 0.1% in Q2 as trade tensions weighed on its export-heavy manufacturing sector, fuelling fears that Europe’s largest economy is teetering on the brink of recession.

The German economy – which grew 0.4% in Q1 – has been hampered by problems in its crucial car-making industry, as well as US-China trade war and the rising prospect of a chaotic hard Brexit.

“German investor economic confidence nose-dived in August, suggesting there will be no early reprieve,” said Rupert Thompson, head of research at Kingswood.

“German manufacturing has been hit hard by the US-China trade war and the woes of the auto sector is the main area of weakness.”

GDP in the Eurozone overall, by contrast, fared rather better in Q2 with a 0.2% gain. However, the risks to growth remain skewed to the downside. The ECB still looks all but certain to cut rates next month and a re-start of its quantitative easing programme remains possible.

“Germany has strongly benefited from the solid global demand for industrial goods in recent years. Currently, demand is weakening, however."

Manufacturing overweight

Germany’s manufacturing industry has above-average share in comparison to the German economy – 21.1% in 2016, compared to a global average of 15.7%, according to the World Bank.

Manufacturing as a share of GDP in Germany has risen from 20.3% in 2004. As a point of comparison, manufacturing as a share of GDP in other developed countries has shrunk, from 13.1% to 11.5% in the United States, for example, or from 12.7% to 10.3% in France.

“Germany has strongly benefited from the solid global demand for industrial goods in recent years. Currently, demand is weakening, however. Global car sales, for example, are likely to have surpassed their cyclical peak. In this respect, the German economy is currently experiencing greater difficulties than France, for example, “said Johannes Müller, head macro research, DWS

“At the moment, construction and services remain important pillars. In addition, consumer demand is benefiting from the robust labour market. For these reasons and based on current data, we continue to expect Germany to be spared a recession.”