Blow to Merkel as German economy struggles to bounce back

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Merkel - CHRISTOF STACHE/AFP
Merkel - CHRISTOF STACHE/AFP

Germany's economy failed to recover as fast as had been expected in the three months to June, dealing a fresh blow to Chancellor Angela Merkel as she prepares to stand down after September's elections.

The eurozone’s industrial powerhouse grew by 1.5pc in the second quarter, missing expectations of a 2pc jump.

It followed a disappointing first quarter of the year, during which GDP dropped by 2.1pc - worse than the 1.8pc dip that the Federal Statistics Office initially estimated.

However, Mediterranean economies picked up the pace and dragged the eurozone out of its double-dip recession.

The single currency area expanded by 2pc, a stronger rebound than expected after contractions of 0.3pc in the previous three months and 0.6pc in the closing quarter of 2020.

Spain led the rebound among the major economies, growing by 2.8pc as tourist hotspots reopened. Italy was close behind, growing by 2.7pc.

Bert Colijn, an economist at ING, said that Germany "was plagued by supply chain problems more than other countries given the size of its car industry, which has been particularly hard hit".

Holger Schmieding, chief economist at Berenberg Bank, said the economy should pick up as soon as those supply problems ease.

"Exactly how long this will take is not yet clear. If demand remains very strong, such issues may not be fully resolved until early 2022 in product sectors where dislocations are most severe, such as intermediate goods and transport," he said.

"However, even in such a scenario, most production would only be delayed, not lost, although persistent supply shortages may further add to building inflationary pressures."

France, meanwhile, eked out a more underwhelming 0.9pc expansion in the quarter, held back by supply bottlenecks and shortages that prevented manufacturing from growing, with consumers instead adding to GDP by opening their wallets, according to economist Tullia Bucco at UniCredit.

"As the country’s vaccination rate further improves, we expect domestic demand to gather steam in the second half of 2021, supported by favorable financing conditions and ongoing fiscal stimulus. Pent-up demand for services is likely to mean that high accumulated savings will be tapped (at least partially) and spur acceleration in private consumption," she said, adding that France was still 3.3pc short of its pre-Covid GDP.

"The main downside risk to our baseline scenario is posed by the spread of the delta variant of the coronavirus. This could dampen the tentative recovery in services, especially in tourism and hospitality."

This is also a threat to the tourist-reliant parts of Spain and Italy, which has just extended quarantine requirements for arrivals.

Rory Fennessy at Oxford Economics said: "The potential ramifications of the delta variant are the main downside risk to the outlook. The progress on vaccinations weakening the link between cases and hospitalisations means that the economic consequences of a new wave of cases will be far milder than those of previous waves. Nevertheless, depending on how the pandemic evolves, this could prompt downward forecast revisions in the coming months."

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