Will Germany Enter a Recession by the End of 2023?

Is Europe’s largest economy heading for another downturn? Data released from the highly respected Munich based ifo Institute* said that following their monthly survey they found confidence has been falling in all four main sectors of the economy: retail, services, manufacturing and construction. The survey found that many German companies have a negative outlook on the current future of the economy.

*ifo Institute – This is a highly regarded Business Climate Index and is representative of early indicators of economic development in Germany with data being published on a monthly basis.

As companies become increasingly pessimistic about the current state of the economy and indeed in Q4, the confidence index has fallen to a 10-month low of 85.7, a fall of 1.7 points. These findings reflect another survey of purchasing managers, where falling new orders, inventories and output, showed German companies had suffered a steep decline in activity not seen for three years.

The across-the-board decline in leading economic indicators suggested another contraction in the German economy for Q3 and Q4 of this year. Indeed, the German economy has been slower to recover from the Covid-19 pandemic than the rest of the Eurozone and the United States. Germany has not seen positive growth for Q1, Q2 and Q3 indicating that Germany’s huge industrial base has been hit hard by a sudden downturn in manufacturing. 

Recent data released showed a further sign of weakness where new orders in the construction sector fell by 2.7% compared to that of June 2022. Such figures show how high interest rates have filtered through to the housing market thereby negatively impacting on activity. Furthermore, recently revised data on German GDP showed the German economy stagnating three months to June compared to the same period in 2022. 

Experts suggest that a lack of momentum in the foreign trade arena combined with high interest rates will keep weighing on the economy in Q3 and Q4, with some senior figures in the finance industry suggesting that the economy could slip into a recession by the end of the year before mounting a recovery in 2024.

Analysts are suggesting that due to the grim outlook for the German economy, the European Central Bank ECB, may not raise interest rates (10^th consecutive time) at their next meeting in September. Since reaching a record high of 10.5% in October 2022, headline inflation in the eurozone is expected to be in the region of 5% in August 2023, however core inflation (excludes food and energy data) remains a problem. So, will the ECB attack core inflation in September with another rate hike or will Germany catch a break with the ECB keeping interest rates where they are?