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Germany’s GDP dropped by 0.2% in Q3 2018, the first contraction since 2015. International trade disputes are likely to blame for the Q3 decline of Europe’s economic powerhouse, raising concerns that the decade-long expansion period may be coming to a close.

Key Takeaways

• The German GDP was forecast to decline 0.1% in Q3 2018
• Analysts polled by Reuters expected Q3 of 2017 to grow by 1.3% instead of the 1.1% reading that was reported last year.
• Yesterday’s ZEW report revealed low economic expectations among Germans

Car sales have taken a hit following the introduction of new anti-pollution standards regarding car emissions, with some analysts commenting that Germany has an auto sector problem as opposed to a broader economic problem.

The more rigorous standards of certification for cars greatly reduces car production which then impacts other related sectors accordingly. The ZEW research institute has said that investors do not expect the German economy to undergo a speedy recovery following slow car production in Q3.

Major automakers like Daimler and Volkswagen were hit hard by new emissions testing standards and had difficulty getting new cars certified. This led them to discount cars ahead of September, consequently causing a shortage of cars available for sale after the September testing deadline. The resulting drop in sales followed increases of 0.5 percent in the second quarter and 0.4 percent in the first.

The German economy is in its ninth year of expansion, but concerns are now mounting regarding global trade disputes and Britain’s EU departure, as well as Chancellor Merkel’s coalition which has come under pressure multiple times and arguably teetered near collapse on two occasions.

Expert Outlook

ÏNG economist Carsten Brzeski expects a Q4 recovery but still finds the July-September slowdown concerning, calling it a wake-up call:

"The poor export performance, despite a weak euro exchange rate, suggests that trade tensions and weaknesses in emerging markets could continue to weigh on Germany's growth performance," he said in a research note.

Bundesbank President Jens Weidmann said on Wednesday:

“The up and down fluctuations in the numbers should not distract us from the fact that the economic upturn in Germany and the euro area remains intact. This is why it is also clear the road back to monetary policy normalization should not be unnecessarily long. We should not take lightly the risks and side effects of extremely loose monetary policy.”

Market Reaction

The price of gold has seen little short-term reaction to the news of the German economic slowdown with spot gold trading at $1,202.62/oz and up 0.29%.

However, positive sentiment for the Euro is driven in the most part by the German economy and related market data - a strong German economy bolsters the Euro, and the reverse may now prove true as well. With EUR/USD already trading low this week, another dent in the value of the Euro could boost the US dollar vs other currencies including gold.