A stubborn Germany is now entering recession

There is currently a big elephant in the room of the German economy. What role this elephant ultimately plays is not yet clear. But there are growing signs pointing to an impending recession. This picture is supported by numerous warning signs that point to a bleak situation for the German economy.

Is the German economy in recession? GDP growth slows down

The unemployment rate has recently risen to 3.4 percent, the order situation in industry is weak according to the Purchasing Managers’ Index, investment is declining, and consumer sentiment in September also plummeted, contrary to expectations, according to GfK. Added to this are numerous business failures and-perhaps the strongest signal-a drop in gross domestic product (GDP): compared to the previous quarter, GDP fell 0.1 percent after adjusting for prices, seasonality and calendar. The Federal Statistical Office in Wiesbaden confirmed on Aug. 27 an initial estimate from late July.

“After the slight increase in the previous quarter, the German economy cooled again in the spring,” Ruth Brand, president of the Federal Statistical Office, told the German news agency. In the first quarter of 2024, GDP grew by 0.2 percent compared to the fourth quarter of 23.

Ifo’s economic climate provides an in-depth picture: the mood in the German economy is negative

So how big will the elephant be in the coming months?

Faced with this assessment, economist Clemens Fuest, president of the renowned Ifo Institute in Munich, contradicted IPPEN.MEDIA, at least for the current state. But in light of the Ifo business climate results released on Monday, August 26, he issued a clear warning: “The mood in companies is declining.” The approximately 9,000 companies surveyed in August rated the current economic situation so negatively that the index fell 0.4 points to 86.6 points.
This means that the value of Germany’s most important economic barometer fell for the third consecutive time, to its lowest level since February. The Bundesbank also expects the economic recession to continue in the coming months. However, a slight economic increase is expected for the third quarter. This would allow Germany to avoid a “technical recession” for the time being.

German exports perform poorly: hope for interest rate cuts in September

The decline in GDP in the last quarter is due to weak exports, among other reasons. Germany sold 0.2 percent less goods and services abroad than in the previous quarter. This is related to the weak performance of the U.S. economy—currently the largest sales market for German products in the world. Experts such as Garry Evans, chief strategist at BCA Research, warn the U.S. TV channel CNBC that the world’s largest economy is also heading for a recession, although this is not yet fully recognized by the market.
The reduction in benchmark interest rates indicated by Fed Chairman Jerome Powell for mid-September could be another indication of this. Experts expect that this expansionary measure will make lending cheaper, the investor market will be stimulated, and the economy as a whole will regain momentum. Anything other than a reduction would cause a stir. But for Evans, this step comes too late: U.S. labor and industrial market data are too weak, and a recession has been looming in the United States for some time.

The European Central Bank is probably aiming for a loose monetary policy. wage growth in Germany is stagnant

But what does this mean for Germany? The European Central Bank (ECB) will discuss adjusting the benchmark interest rate on Sept. 12-again, as with the reversal of interest rates in June, ahead of the Federal Reserve (Fed). The ECB then lowered the interest rate by 0.25 percentage points to 4.25 percent. The Fed, however, held the benchmark interest rate steady at 5.5 percent. Despite the Fed’s clear indications, it is still uncertain whether the ECB will repeat this step. However, one argument for easing monetary policy is the data on collective wage growth in the eurozone.

In the second quarter, this fell from 4.7 percent in the previous quarter to 3.6 percent, according to ECB data, which was heavily influenced by the significant stagnation of wages in Germany. Experts also see this as a relief for the ECB, whose chief economist Philip Lane had feared that rising labor costs could trigger galloping inflation, which would hamper economic growth.

Will interest rate cuts create a domino effect? It could benefit the construction and manufacturing sectors

Jean-Paul van Oudheusden, an analyst at the trading platform eToro, supports this move by the ECB in the Tagesschau: “The economy urgently needs support in the form of interest rate cuts Of course, not entirely altruistic, as experience shows.” trading volume in equity markets increases when the ECB cuts the interest rate.

However, easing the economic burden in the euro area would also benefit the German economy. The construction sector, which is seriously struggling, among others, could benefit from the cheaper loans that would result from lower interest rates. Thomas Gitzel, chief economist at VP Bank, cautiously hopes for a domino effect to Reuters: “If the construction sector were to gain momentum, the manufacturing sector could also benefit.”
If the ECB lowers its benchmark interest rate and the Fed follows suit, the economy could eventually be stimulated, and the current huge elephant could shrink a bit.