German economy shrinks again – recovery fails to materialise

German economy shrinks again – recovery fails to materialise


Referreport

The economy is performing even worse than expected in the second quarter. And that’s not all: A renewed sharp rise in consumer prices could weaken people’s consumption.

Gloomy prospects for the German economy: After a contraction in economic output in the second quarter, Germany is at risk of falling back into recession. Gross domestic product (GDP) unexpectedly fell by 0.1 percent in the second quarter, as the Federal Statistical Office in Wiesbaden reported based on preliminary data. At the same time, inflation remains stubborn: In July, the rise in consumer prices picked up again at a rate of 2.3 percent, according to preliminary data from statisticians, after inflation had fallen in June.

This means that Europe’s largest economy has to cope with another setback after a brief recovery at the beginning of the year. Statisticians cited weak investments and the slump in construction as the reasons. Export-dependent Germany is also dragging down the eurozone, which nevertheless grew by 0.3 percent in the second quarter according to the statistics office Eurostat. Economists were disappointed; they had expected at least a slight increase for the German economy after a mini-growth of 0.2 percent in the first quarter.

Hopes for increased consumption by citizens in the second half of the year were also immediately dampened by the renewed rise in consumer prices. At the same time, the inflation rate, excluding the volatile prices of food and energy (“core inflation”), remained at 2.9 percent.

The chief economist of Deka Bank, Ulrich Kater, nevertheless sees signs of a further calming of inflation in Germany: “The price of crude oil has recently continued to fall. This, together with a gradual calming of the price increase in services, should also ease inflation in the coming months.”

At most “anemic growth” for the year as a whole

“The German economy is stuck in a crisis,” says Klaus Wohlrabe, head of economic surveys at the Ifo Institute. The turnaround is taking time, especially in industry, which is lacking new orders. The recovery in private consumption is also slow.

The decline in gross domestic product shows once again that there can be no talk of a significant upturn, says Commerzbank chief economist Jörg Krämer. “The threefold decline in the Ifo business climate and the weakness of the other economic indicators suggest at best anemic growth for the second half of the year.”

Concerns about Germany as a business location

Last year, Germany slipped into a slight recession. The export-oriented German economy felt the effects of the global economic slowdown, as well as the skyrocketing energy prices and rapidly rising interest rates. There is also a shortage of skilled workers and companies complain about too much bureaucracy.

A first interest rate cut by the European Central Bank (ECB) in June has not yet brought about any dramatic improvement for the German economy. Many economists expect a further interest rate cut in September. But the renewed rise in inflation in Germany in July suggests that the ECB still has work to do. “An interest rate cut in September is not yet certain,” says Carsten Brzeski, economist at the ING bank.

Growth forecasts just above the zero line

Brzeski complains that Germany’s economic performance is just as unconvincing as the country’s medal haul at the Olympic Games in Paris. There is no improvement in exports in sight, for example, because both the USA and China are losing economic momentum. Germany remains the loser in the Eurozone, where countries such as Italy and Spain have recently recorded growth.

A rapid recovery of the German economy is a long way off: the federal government is only expecting growth of 0.3 percent this year. The slight growth in the first quarter is only proving to be an interim high. Economists speak of a “technical recession” when the economy shrinks in two consecutive quarters. However, little improvement is expected for the third quarter, said Ifo expert Wohlrabe, referring to the Ifo business climate index that fell in July.

Dependence on global markets slows economic growth

Economists see at least a few glimmers of hope for the second half of the year. The economic recovery is on shaky ground in the current third quarter, said Fritzi Köhler-Geib, chief economist at the KfW development bank. “However, the services sector is likely to continue to expand and the construction industry may also have passed the low point in view of the renewed increase in demand for housing loans.” Private consumption could also provide some rays of hope.

Turnaround not expected until 2025

The Bundesbank also expects a somewhat stronger economy for the third quarter. However, in its most recent monthly report, the central bank also saw the risk that economic growth could fall short of recent expectations. In June, the monetary authorities had expected growth of 0.3 percent for this year. According to the Bundesbank, the situation is not expected to improve until 2025. Then it expects the German economy to grow by 1.1 percent.

Source: German