Germany is facing an even LONGER recession than feared as business morale slumps

Germany is likely facing an even longer recession than analysts predicted after a recent survey showed business morale in the country continued to tank for the second month in a row.

Munich’s Ifo institute for economic research said its business climate index fell to 88.5 this month from 91.5 in May – a considerable drop of more than 1.5 points further than predicted.

‘Sentiment in the German economy has clouded over noticeably,’ Ifo’s president Clemens Fuest said.

Germany’s gross domestic product (GDP) fell by 0.3 per cent in the period from January to March, according to figures released last month, embarrassing the German government which had boldly doubled its growth forecast for this year. 

The government predicted that GDP will grow by 0.4 per cent – up from a 0.2 per cent expansion predicted in late January – a forecast that will now likely need to be revised downwards. 

It comes as the International Monetary Fund (IMF) was last month forced to admit it had miscalculated its prognosis of the post-Brexit British economy, which is now set to avoid recession despite the withdrawal from the EU. 

German Chancellor Olaf Scholz’ government was embarrassed last month when new figures showed Germany’s GDP fell by 0.3 per cent in the first quarter of 2023, despite the government having doubled its growth forecast for this year 

The IMF foundation now expects the UK’s economy to grow by 0.4 per cent in 2023, despite declaring just last month it would contract by 0.3 per cent. 

In Germany, the prognosis is more gloomy, with several economists predicting their economy is in for a longer recession.

‘The slump in the German Ifo, together with the drop in the Purchasing Manager’s Index (PMI), suggests that German GDP probably contracted for the third quarter in a row in the second quarter,’ said Franziska Palmas, senior Europe economist at Capital Economics. 

The economic research firm expects the economy to remain in recession throughout 2023.

‘We feel confirmed in our forecast that the German economy will shrink again in the second half of the year,’ Commerzbank’s chief economist Joerg Kraemer said.

And Carsten Brzeski, global head of macro at ING, said: ‘What is clear is that the optimism at the start of the year seems to have given way to more of a sense of reality.’ 

The economy faces the prospect of a longer recession as domestic demand and the expectations of exporters have both weakened, Klaus Wohlrabe, head of Ifo surveys, told Reuters in an interview on Monday.

‘The probability has increased that gross domestic product will also shrink in the second quarter,’ he said.

German Chancellor Olaf Scholz speaks during the celebrations for the 25th anniversary of the European Central Bank (ECB) in Frankfurt last month. Germany’s economy has entered a recession despite positive predictions from German government

The Bundesbank meanwhile said on Monday that it believes the recession in Germany will end soon, with gross domestic product rising slightly in the second quarter of 2023.

‘Private consumption should bottom out,’ experts from the German central bank wrote in the report. 

‘Thanks to strongly rising wages, the real disposable incomes of private households are stabilising despite inflation remaining very high.’

But the Ifo survey showed that numerous sectors of the Germany economy were concerned with the economic prognosis, particularly the manufacturing sector which posted the largest deterioration on the month. 

‘It is clear that industry remains under pressure from waning demand, in line with Friday’s PMIs which saw industry in the euro zone’s biggest economy deep in contractionary territory amid rapidly shrinking backlogs and destocking,’ said Mateusz Urban, senior economist at Oxford Economics.