Germany on brink of recession, says expert

The business climate in Germany worsened "significantly" in July, according to a key survey published Monday, as an energy crisis pushed Europe's largest economy closer to a recession this year.

An employee at a shop handles cash. Germany is facing tough times economically, according to experts.
An employee at a shop handles cash. Germany is facing tough times economically, according to experts. Photo: picture alliance/dpa | Fabian Sommer

The Ifo institute’s monthly confidence barometer, based on a survey of 9,000 companies, fell to 88.6 points in July from 92.2 points last month and the “lowest level since June 2020” near the start of the coronavirus pandemic.

The pessimistic figures suggest that “Germany is on the cusp of a recession”, said Ifo president, Clemens Fuest.

The mood among businesses had “cooled significantly”, while “higher energy prices and the threat of a gas shortage are weighing on the economy”.

The fall was particularly steep in the manufacturing sector, where “pessimism regarding the coming months reached its highest level since April 2020”, Fuest said.

READ ALSO: How Germany’s soaring inflation is hitting household budgets 

“Weaker global demand (and) supply chain frictions” were also weighing on the Germany economy, said ING analyst, Carsten Brzeski.

The strong headwinds and weak data meant Germany’s economy could have seen a contraction “already in the second quarter”, Brzeski said.

The risk that Russia could cut off its supply of gas to Germany, in retaliation for Berlin’s support of Ukraine, has prompted fears of an energy
shortage at the end of the year.

Looking ahead, “there are more downside than upside risks to the outlook”, Brzeski said.

“A further escalation in the energy crisis will remain a key risk for the economy going into the winter,” he said.

Businesses’ expectations for the economy fell sharply to 80.3 points in July from 85.5 the previous month.

Their assessment of the current situation sank to 97.7 points in July from 99.4 points previously.

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Germany reaches agreement on Bürgergeld – with a couple of catches

Members of Germany’s traffic light coalition government and the opposition Christian Democratic Union party have reached an agreement in the dispute over plans for a new citizens‘ income. There will be tougher sanctions against benefit recipients and fewer discretionary assets.

Germany reaches agreement on Bürgergeld - with a couple of catches

Last week, the German government’s plans to reform unemployment benefits with its new “Bürgergeld”, or citizens’ income, proposals were blocked in the Bundesrat.

The legislation was held up mostly by members of the Christian Democratic Union (CDU/CSU) which had been strongly opposed to the proposals for a six-month Vertrauenszeit (trust period) in which benefits claimants would not incur sanctions, as well as to the amount of assets recipients would be able to hold on to.

READ ALSO: EXPLAINED: Will Germany’s controversial Bürgergeld still come into force?

On Tuesday, politicians from the traffic light coalition parties and the CDU/CSU reached a compromise on the proposed reforms which means that some of the key measures will be scrapped.

No trust period

The CDU/CSU was able to push through its demand for more sanctions for recipients and the six-month trust period will now be scrapped completely.

Instead, it will be possible to enforce benefit sanctions from the first day of an unemployment benefits claim if recipients don’t apply for a job, or fail to turn up for appointments at the job centre, for example.

The CDU and CSU also demanded that unemployment benefits recipients be allowed to keep less of their own assets when they receive state benefits. The original plan had been for assets worth up to €60,000 to be protected for the first two years, but the compromise reached has knocked this down to €40,000 for one year – during which time benefits recipients will not have to use up their savings.

Following the announcement of the agreement, Green Party later Britta Haßelmann said “I regret it very much”. According to Haßelmann, the trust period was the core of the reform designed to stop people from having to take up “just any job”.

READ ALSO: Bürgergeld: What to know about Germany’s unemployment benefits shake-up

Other traffic light colleagues were more optimistic, however. Katja Mast from the SDP spoke of a “workable compromise in the spirit of the matter,” while FDP Parliamentary Secretary Johannes Vogel said that it had succeeded in “making a good law even better”.

CDU/CSU leader Friedrich Merz, meanwhile, sees the compromise as a great success for his party, though he also praised the willingness of the parties in the government to reach an agreement.

“The coalition was very quick and – to my surprise – very largely willing to make compromises here,” Merz said. 

What happens next?

Tomorrow, the Mediation Committee of the Bundestag and Bundesrat will meet to discuss the proposals. If the agreement is confirmed, the welfare reform could clear the final hurdle when it is voted on Bundesrat again at the end of the week. According to the federal government’s plans, if it’s approved, Bürgergeld will come into force in January and replace the current Hartz IV system.