Is Germany leading the euro zone toward the no-growth cliff?

[thenews]

Bye, bye German growth story.

In less than a year, Germany — touted as Europe’s economic engine, the region’s powerhouse, etc. — could be heading toward the no-growth cliff and possibly dragging the euro zone down with it. Manufacturing is weak, it looks like unemployment is creeping up again and fresh data out on Tuesday show exports and imports unexpectedly fell in May. As icing on the cake, the OECD’s leading indicator for Germany fell for a third straight month, a sign of “growth losing momentum.”

So should we be worried? You bet we should. According to Steen Jakobsen, chief economist at Saxo Bank, the weak German economy remains the biggest surprise in Europe at the moment. So much so, that by the first quarter of 2015, GDP growth will likely have fallen all the way to nothing.

“This will probably mean that we’ll see a correction in the stock market and higher unemployment,” he said. “If the economy slows to zero, it will weigh on euro-zone growth and the euro zone could also slip back to 0% growth.”

A no-growth quarter for Germany would be a drastic departure from the country’s economic performance this year. In the first three months of 2014, Germany’s economy expanded by 0.8%, marking the strongest quarterly output growth in three years. But it looks like second-quarter growth will land at a meager 0.1%. So what happened?

According to Jakobsen, the answer can be found both globally and domestically. First, several Asian countries, led by China, have shifted their tactics from growth at all costs to quality growth. That essentially means lower GDP expansion, which will hurt countries partly dependent on exporting to China, such as Germany.

“Germany, like Australia, was riding the Asian tiger throughout the early parts of the crisis and now those early stages of strength will be replaced by weakness,” he said.

Secondly, Europe’s biggest economy has one of the most expensive energy policies in the world. The government has agreed to phase out nuclear power by 2022 in an effort to rely more on renewable energy — a great strategy from an environmental point of view, but an extremely expensive one.

Jakobsen said the costs of switching over are massive, and are passed on to consumers and companies, with the latter ultimately ending up moving production elsewhere. A recent example of this is BMW BMW , which earlier this year decided to build an energy-intensive plant in Washington state, where electricity costs are a sixth of what they would have been in Germany, the company’s home country.

“We’ll see a cyclical low for the German economy in Q1 and Q2 of 2015, with low inflation and low growth expectations and this will lead to short-term corrections to the growth of Germany,” he said.

A slowdown in Germany will be broadly felt elsewhere in the euro zone. Stephen Pope, managing partner at Spotlight Ideas, said in a note on Tuesday that the German economy is essential for the health of the wider currency union, as it accounts for almost 30% of the euro zone’s GDP by nominal value.

“If the number one economy is running at anything less than full tilt then the overall region will struggle to expand and the ECB will face an enduring headache of disinflation leading to deflation. Without a vibrant Germany, the 18-member euro zone will struggle to expand,” Pope said.

And that calls for immediate European Central Bank action. The ECB needs to launch an aggressive quantitative easing program that extends into the sovereign bond market and longer-dated bonds from the non-bank private sector, Pope said. The bank can’t afford to wait and see if current liquidity-raising measures work.

“Until such action is undertaken it hard to feel confident about the economic prospect of those 18 nations that are conjoined by a currency that proves one size does not and never will fit all,” he said.

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