Germany's economy just shrank, meaning Europe's biggest economy is 'teetering on the edge of recession'

Reuters/Hannibal Hanschke

• Germany's economy shrank 0.1% in the second quarter, driven by a decline in exports due to the US-China trade war.
• The slowdown is bad news given Germany is Europe's largest economy and a key player in the eurozone.
• The contraction comes after the UK economy shrunk last week for the first time since 2012 due to Brexit fears, underlining how political uncertainty is weighing on Europe.
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Germany's economy shrank by 0.1% in the three months to June, signaling a recession could be looming.

The decline marks a sharp shift from the 0.4% growth it recorded in the first quarter of 2019, according to Statistisches Bundesamt, the Germany's statistics office. Europe's biggest economy grew the least in six years in the first quarter, according to the Financial Times.

Much of the decline was driven by a slump in exports, which have suffered from tempered demand due to the US and China's trade war.

"The development of foreign trade slowed down economic growth because exports recorded a stronger quarter-on-quarter decrease than imports," the Statistisches Bundesamt said.

Signs for the next quarter look "ominous," Capital Economics said in an email. "Manufacturing business surveys for July were all gloomy, as was the ZEW survey for August."

"While the services sector should continue to hold up better, there are some signs that the slump is spreading to the labour market," the economic research firm added. "The bottom line is that the German economy is teetering on the edge of recession."

Several of Europe's economies are weathering growth slowdowns, many due to political uncertainty. Brexit fears fueled a 0.2% contraction in Britain's economy last quarter - its first decline since 2012.

"Today's disappointing GDP figure is set to raise alarm bells over Brexit dragging the UK economy deeper into the abyss," Lukman Otunuga, a senior research analyst at FXTM, said at the time.