U.S. Protectionist Stance Spooks Germany's Economy

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A steel worker at a Thyssenkrupp steel factory in Duisburg, Germany.

A steel worker at a Thyssenkrupp steel factory in Duisburg, Germany.


Photo:

Martin Meissner/Associated Press

FRANKFURT—President

Donald Trump’s

trade threats aren’t only hurting feelings in Germany. They are beginning to weigh on the country’s economy.

The European Union’s largest economy, whose export-oriented vigor has kept the continent afloat for more than a decade, is cooling more rapidly than expected in what economists see as the early fallout from protectionist moves by the U.S.

The slowdown comes just as Europe has been gradually emerging from the economic hangover caused by the continent’s debt crisis in 2010.

German Chancellor Angela Merkel and other leaders talking with U.S. President Donald Trump at last week’s Group of Seven meeting, which ended in discord over trade.

German Chancellor Angela Merkel and other leaders talking with U.S. President Donald Trump at last week’s Group of Seven meeting, which ended in discord over trade.


Photo:

Jesco Denzel/Bundesregierung/Getty Images

After years of robust growth fueled by foreign demand for premium cars and engineering goods, Germany saw its annualized growth rate roughly fall by half in the first quarter of 2018. Exports have fallen in three of the first four months of the year, manufacturing orders are down and sentiment indicators are in free fall.

The weakness can’t be blamed on the U.S. president’s “America First” policies alone. A cold winter and a bad flu epidemic appear to have slackened growth earlier this year. But the bad news has been so persistent since then that economists are now looking for other explanations.

“It’s clear that concerns over protectionism and the more assertive foreign-policy stance of the U.S. have begun to have real economic implications,” said

Oliver Rakau,

a Frankfurt-based economist with Oxford Economics.

Because Germany is so dependent on international trade, economists argue, the protectionist war cries coming from the White House are having a chilling effect even in the absence of a fully fledged trade war, damping both sentiment and actual economic activity.

Germany’s economics ministry on Wednesday warned the trade dispute was causing some businesses to take a “wait-and-see position” concerning investments.

Last weekend, Mr. Trump reiterated threats of punitive levies on imported cars, Germany’s flagship industry, and threatened to shut the entire U.S. market to other industrial nations if he didn’t secure better terms of trade with them.

An earlier decision by the Trump administration to slap tariffs on steel and aluminum imports has infuriated European Union officials, who filed a World Trade Organization challenge against the U.S. measures and announced rebalancing duties on American exports expected to kick in early next month.

“An escalation of the trade conflict would hit us,” said Wolf-Henning Scheider, CEO of ZF Friedrichshafen AG, a leading automotive supplier. “The global automotive industry is a highly complex network of flows of goods, and such discussions are poison to our business.”

Germany is the third-largest exporter in the world, after China and the U.S. In 2017, the country exported €111.5 billion ($131 billion) worth of goods to the U.S., of which €28.6 billion were cars and car parts, according to the German statistics office.

“No other country in the world would suffer higher absolute losses from U.S. car tariffs than Germany,” said

Gabriel Felbermayr,

a director at the Ifo Institute, a supply-side economics think tank in Munich.

Germany’s annualized growth rate eased to 1.2% in the first quarter from 2.5% in the last three months of 2017, undermined by a drop in exports. In comparison, the U.S. economy expanded by 2.3% in the first quarter.

Recent data suggests more bad news ahead for Germany. The country’s manufacturing orders—an indicator of future production—declined for the fourth consecutive month in April, while manufacturing output dropped 1.7% that month compared with March, according to the statistics office.

“The economic slowdown that we are observing now should become more pronounced,” said

Clemens Fuest,

the Ifo Institute’s president.

Mr. Trump’s trade rants are also making German consumers uneasy, according to the head of the Forsa polling institute,

Manfred Güllner.

About 43% of Germans expect the country’s economic conditions to deteriorate in the coming years, compared with just 26% in January, according to Forsa.

To be sure, economists say the German economy isn’t on the verge of a crash. The construction sector is still booming and a healthy backlog of manufacturing orders will keep companies busy for another couple of months. Furthermore, the government is expected to ramp up spending in the second half of the year, which will help mitigate the effects of weaker trade.

While forecasters have turned more bullish on the U.S. economy largely thanks to Mr. Trump’s sweeping tax cuts, they are increasingly nervous about Germany’s outlook.

Economists at

Barclays

last week revised their second-quarter growth forecasts to a 1.7% annualized rate from 2.5%, while economists at

Commerzbank

see the economy expanding by about 1.2% in the second quarter.

“There are still plenty of orders in the books, and that will keep companies going for a while,” said

Ralph Wiechers,

chief economist at the VDMA engineering federation. “But economic growth has lost its dynamism.”

Write to Nina Adam at nina.adam@wsj.com

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