UPDATE 2-German exports to China slump as recession risk grows

* Exports to China slump 6.5% y/y in January

* Stats Office says drop not yet linked to coronavirus

* Economists expect virus impact to show up in Feb data

* Expectations grow for Q1 contraction after Q4 stagnation (Adds economist comment, detail, background)

By Paul Carrel

BERLIN, March 9 (Reuters) – German exports to China fell by 6.5% on the year in January and the Federal Statistics Office said the drop could not yet be linked to the coronavirus, as the looming impact of the epidemic threatens to tip Europe’s largest economy into recession.

German manufacturers depend on both demand and supply chains from China, Germany’s biggest trading partner. Economists expect the virus fallout to show up in data from February and push the economy into contraction in the first quarter.

German industry had already contracted for six quarters in a row before the outbreak of the coronavirus early this year, weighed down by global trade conflicts and Brexit uncertainty.

“There are growing signs that the service sector, which has so far stabilised the economy, is also suffering more and more,” said Commerzbank economist Ralph Solveen. “That is why we expect the German economy to contract slightly in the first quarter.”

The economy stagnated in the final three months of 2019.

Economists usually define a recession as two consecutive quarters of negative growth.

Business association BDI said on Thursday that Germany is heading for its longest recession since reunification in 1990 as the coronavirus exposes its vulnerability to disruptions in global trade.

Domestic businesses hit by the outbreak include hotels and transport companies. Several international trade fairs have been cancelled, including the ITB Tourism Fair.

On Sunday, the government promised aid to companies hit by demand collapsing as a result of the coronavirus epidemic. The health minister urged a halt to large public events in the hope of reducing the burden on the healthcare system.

Monday’s trade data showed imports from China fell by just 0.5% on the year in January.

“No clear effects of the coronavirus can be deduced from the results available to date,” the Office said of the trade data with China.

Total German exports were unchanged compared to December, and imports rose 0.5% in seasonally adjusted terms.

Separate data released on Monday showed German industrial output surged by 3.0% in January, surpassing a Reuters consensus forecast for a rise of 1.7%.

“The 3% increase provides an important buffer: a kind of stockpile for the difficult times ahead,” said Thomas Gitzel, economist at VP Bank Group.

After Italy and France, Germany has the largest number of coronavirus cases in Europe, and concern is growing about the economic and public health consequences of what threatens to become a global pandemic.

At talks late on Sunday, the parties in Chancellor Angela Merkel’s governing coalition agreed to make it easier for companies to claim subsidies to support workers on reduced working hours until the end of the year.

That would make it possible for firms to cut the hours and wages they offered their workers with the German government making up the shortfall, sparing workers from layoffs which might otherwise become necessary.

Several German companies have been hit by the epidemic, including carmaker Daimler and airline group Lufthansa, which has cancelled half of its flights over coming months. (Writing by Paul Carrel Editing by Riham Alkousaa and Catherine Evans)

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