Great Graphic: It Ain't Your Father's Locomotive

This Great Graphic comes from Markit's Chris Williamson.   It illustrates that the German goods producing sector has fallen on hard times again.  The economy contracted by 0.2% in Q2.  Another decline in Q3 cannot be entirely ruled out, though it may just escape with something just above stagnation.  

The main cause that most politicians and economists will focus on is the impact from the sanctions and counter-sanctions over Ukraine.  This is indeed a contributing factor.   Another external headwind may come from China, which has also clearly lost its sizzle.  There may also be domestic, structural headwinds.  In terms of reforms, German has been resting on its laurels, which some Bundesbank officials have noted in criticism of Berlin.  

While cognizant that Germany industry has supply chains throughout western, central and eastern Europe, the divergence between the German economy and the rest of EMU may help explain part of the different policy stances.  Germany, after all, is one of the few major economies that is larger now than before the crisis.  It is the only major country that has expanded faster in the last five years than it did in the five years through 2007.     

The weakness of the German economy will not do the economies of the periphery much good.  However, the German economic strength didn't do the euro zone much good in terms of growth either.  The channel that might be impacted is policy.  A Germany that is in a recession is likely to see its interests more aligned with the weaker parts of the eurozone, especially given that the government is a coalition between the CDU and SPD.