Germany’s export-led economic model is called into question, forcing the government to rethink its fiscal policy.

Slumping exports have brought Germany on the brink of recession, according to data released on Wednesday. The overall output in the second quarter fell by 0.1%, as a Sino-American trade war and the prospect of Brexit are weighing on global business and consumer confidence. The domestic market is also affected, as construction also appears to be slowing down.

According to the Federal Statistics Office, annual growth had slowed to 0.4% from 0.9% in the first quarter. This has a direct effect on the Eurozone: Eurostat said GDP growth in the 19-country eurozone was 0.2% in the second quarter, down from 0.6% in the first three months of 2019.

In a statement to the populist tabloid Bild, Economy Minister Peter Altmaier said Wednesday’s data was a wake-up call, calling for a more expansionary budget. His view echoes the opinion expressed by the powerful German manufacturing association (BDI).

In an article by BDI’s managing director Joachim Lang published on Wednesday by the business daily Handelsblatt, it is argued that the balanced budget policy “should be called into question in an economically fragile situation.”

Europe’s foremost fiscal hawk, Bundesbank President Jens Weidmann, insists that domestic demand remains robust, as the German economy still enjoys record-high employment, inflation-busting pay hikes and low borrowing costs.

But there are now calls to take action before the fundamentals begin to deteriorate. 2019 is now projected to close with 0,5% growth, compared to 1,5% in 2018. Given this negative momentum, 2020 appears to be a year of recession for the German economy.

Weidman was echoing Chancellor Angela Merkel, who said on Tuesday that there was no need “right now” for an expansionary budget. Instead, the government announced limited tax cuts, removing the Soli income tax surcharge for most employees from 2021, a relief worth €11bn that will take place in 16 months time. This appears to be too little and perhaps too late.

By Tuesday evening Chancellor Merkel seemed less assertive on her commitment to zero-deficit. “It’s true, we’re heading into a difficult phase,” Merkel said at a town hall event in the northern city of Stralsund, promising to “react depending on the situation,” widely interpreted as opening the door to more expansionary budgetary policy.

Ahead of regional elections in Saxony and Brandenburg on September 1, Merkel’s Christian Democratic-led bloc as well as her junior coalition partner, the Social Democrats, have plummeted in opinion polls. In both states,

the Alternative for Germany (AfD) could emerge as the main beneficiary of this electoral erosion of the government coalition.