German economy is ‘down on its knees’: Is a recession looming?

Germany's economy contracted in the second quarter, figures showed Wednesday, highlighting its vulnerability to trade tensions and fears of a no-deal Brexit, stoking a debate on higher government spending.

German economy is 'down on its knees': Is a recession looming?
Storm clouds over Frankfurt's banking centre. Photo: DPA

Recent days and weeks have brought a slew of negative indicators for Germany's economy, with exports and manufacturing especially hard hit.

Machine-tool makers – the country's second-largest industrial sector after cars – reported 22 percent fewer orders between April and June, their federation said Tuesday.

Other top German industries such as cars and chemical firms have also been impacted. A prime cause is the global growth and trade slowdown, but also political tensions such as worries over a no-deal Brexit, and escalating trade conflicts with the US.

SEE ALSO: Car market slowdown threatens jobs at Germany's Bosch

Factory outfitters have also been undermined by an automotive industry transitioning towards electric vehicles away from the combustion engine.

“Trade conflicts, global uncertainty and the struggling automotive sector have finally brought the German economy down on its knees,” ING bank economist Carsten Brzeski commented.

While federal statistics authority Destatis will only provide a detailed GDP breakdown later this month, its broad-stroke report showed higher household and government spending supported expansion, while weaker trade was a brake on growth.

Now the German economy is lagging by minus 0.1 percent, placing it alongside Britain, down .2 percent in the quarter.

In the eurozone, Germany has fallen from being the model pupil to lagging Italy's standstill economy and France which posted 0.2 percent growth.

This tweet from Destatis shows German economic growth since 2013.

Recession looming?

Looking ahead, the horizon is cloudy for the present quarter, as showed in the closely watched Ifo business confidence index in late July which hit its lowest level since 2012.

As other indicators hover in the red, a second quarter of contraction and thus a technical recession could be looming, some economists expect.

“With the escalating trade conflicts of the USA, the ever more probable chaos (of) Brexit and the weaker world economy, the perfect storm has been brewing since the summer of last year,” said Klaus Borger, an economist at public investment bank KfW.

Photo: DPA

SEE ALSO: German-British trade plummets as no-deal Brexit warnings intensify

“The door at least to a technical recession… is wide open,” Borger added.

Berlin still predicts growth of 0.5 percent over the full year, while the International Monetary Fund (IMF) is more positive with an 0.8 percent forecast.

But those figures are far below the 2.2 percent growth of 2017 or the 1.4 percent achieved last year.

Defying the threats from abroad, a German unemployment rate close to historic lows has prompted wage rises and boosted consumption.

SEE ALSO: German unemployment rate rises for first time in five-years

Budget battle

Multiple threats to growth matched with still-bulging state coffers have already begun to stoke a debate on increased public spending.

“The time looks more than ripe for the federal government to finally change course, use the room for manouevre in public budgets sensibly and follow an agenda to modernize Germany as a site for business,” said Claus Michelsen, an economist at the DIW think-tank.

“The state should spend more to move forward projects in the energy and mobility transition, digitalization and the housing market too.”

SEE ALSO: How Germany plans to zoom out of the digital slow lane and why it could struggle

IMF and European Commission leaders have long pressed Germany to open the
purse strings, hoping higher government spending could stimulate demand, increase imports and balance out its massive trade surplus.

Germany's economy has partially slumped due to escalating trade conflicts with the US, say economists. Photo: DPA

But a “debt brake” rule written into the constitution in 2009, at the height of the financial crisis, prevents a massive expansion of government spending beyond present means.

Some politicians in the centre-left social democrats (SPD) — junior partners to Chancellor Angela Merkel's conservative CDU — have called into question the coalition government's still more stringent “black zero” budget policy of absolutely no new debt.

“In a marked downturn, (the black zero) would not be appropriate as a guideline,” the head of the government's influential Council of Economic Advisers, Christoph Schmidt, told Der Spiegel magazine last week.

But Merkel does not believe the moment has come for large-scale intervention from the government.

“I don't see any need for a stimulus package at the moment” even though the economy is in a “difficult phase,” she told constituents at a meeting in Baltic coast town Stralsund Tuesday.

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German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.