The succession of bad economic news from Germany has already turned into an avalanche. Each negative macro data is followed by headlines such as the announcement by a colossus and national emblem like Volkswagen of its intention to close factories in the country. The rigors of the pandemic, the end of cheap Russian gas after the war in Ukraine, the high interest rates needed to curb inflation and the new trade dynamics (the “Chinese friend” is no longer buying as it used to) have sent the traditional European economic locomotive into a tailspin. The outlook could not be worse and, even if the recession is more than telegraphed in the short term, the horizon does not seem positive. The image of a champion who fell into ruin after having touched glory comes to the minds of sports fans.
The umpteenth final blow came on Tuesday with the monthly survey of 7,000 German companies conducted by the Leibniz Institute for Economic Research at the University of Munich. It ifo business confidence index Germany, probably the most closely watched in the entire Eurozone, surprised negatively in September. The indicator fell from 86.6 points in August to 85.4 in September, marking the worst reading since the beginning of the year and while a slight decline to 86.1 was expected. The decline was mainly due to the decrease in the current conditions index (from 86.4 to 84.4), although the expectations index also decreased (from 86.8 to 86.3).
“The outlook for the coming months continues to deteriorate,” Ifo President Clemens Fuest acknowledged in a statement on Tuesday, noting that the manufacturing index is at its lowest level since 2020. “The German economy is under increasing pressure,” the report said. German openly admitted this, stressing that “The lack of orders has intensified”“The core sectors of German industry are in trouble,” he added, confirming what everyone already knows: Germany’s once-powerful industry is operating at very low hours and mired in an existential crisis.
The new bucket of cold water thrown by the Ifo follows rather disastrous leading indicators of private activity known this Monday. The purchasing managers’ indices (PMI index) prepared by the S&P Global survey companies showed that the situation in Germany was anything but good so far in September. The report included devastating data such as the lowest employment rate in 15 years (excluding the covid epidemic) and more than worrying sentences: “In a sign of resignation, companies have cut staff at a rate not seen since the pandemic”. The author of the report, Dr. Cyrus de la Rubia, wrote it without hesitation: “Optimism is a thing of the past”.
“The recent deterioration in activity surveys suggests that, After a contraction of 0.1% in the second quarter, the German economy probably contracted again in the third.. Admittedly, the Ifo has exaggerated the weakness of the economy over the past year and the 2% quarterly contraction it is talking about seems too large. However, the historically better composite PMI also points to a GDP decline of around 0.4% per quarter. We currently expect a 0.2% quarterly contraction in the third quarter and stagnation in the fourth, but the risks are clearly tilted towards a worse outcome,” Franziska Palmas, senior European economist at Capital Economics, said in a note to clients.
own Federal Bankwhile stressing that a severe economic downturn seems unlikely, warned that Germany could already be in recession, with a possible further contraction in the third quarter. Economists have already started to revise downward their forecasts for this year, with some now predicting stagnation or even a further slight slowdown. Germany was the only G7 economy to contract in 2023.
Always fond of football metaphors to explain the economy, Carsten Brzeski, economist at ING, saves the figure of the legendary player Andreas Brehme to explain what is happening. The former footballer, who recently passed away at the age of 63, found fame in 1990, when he scored the penalty in the final against Maradona’s Argentina that gave a newly unified Germany the World Cup. Despite this success, Brehme later experienced the troubles and misfortunes of football, with a career that quickly faded and with periods in which he declared himself financially ruined. In fact, he coined the eloquent phrase “If you have shit stuck to your foot, you have shit stuck to your foot”“German football describes an almost endless streak of bad luck. Even if the current streak of bad luck for the German economy is largely caused by the country,” Brzeski says.
Commerzbank: “No real recovery in sight”
“The German economy is back to where it was a year ago: at the tail end of growth in the eurozone and with few signs of imminent improvement,” the ING economist assures. “The cyclical hope that had taken hold of the German economy in the first months of the year has disappeared, mainly due to a weaker global economy, but also due to fears of a cooling of the American economyTHE geopolitical tensions in progress and internal political uncertainty“.
“In addition, the increasing number of insolvencies and individual company announcements on upcoming job restructuring continue to weigh like a sword of Damocles on what has been one of the few bastions of the economy in recent years: the labor market,” says the expert. “It is worrying that after a long period of resilience in the labor market, the prolonged weakness “Industry has begun to expand hiring intentions, with the risk of putting a brake on the recovery in consumption,” says Mateusz Urban of Oxford Economics.
“To make matters worse, the recent negative news from the German auto industry is in some ways just another illustration of the persistent structural and cyclical problems, but unfortunately it also risks fuelling further negative sentiment. a perfect vicious circle” concludes Brzeski of ING.
The glimmers of hope are minimal. “As far as the economic cycle is concerned, the headwinds are likely to ease somewhat next year. First, companies are likely to become increasingly accustomed to higher interest rates, especially since the ECB is likely to reduce two-thirds of the increase in energy prices in 2021/22. The situation has already reversed, although energy remains expensive in Germany compared to the US. Third, private consumption is likely to increase somewhat next year, as citizens’ fears about inflation will have diminished by then,” says Jörg Krämer, economist at Commerzbank. However, he himself acknowledges that despite these mitigating factors, the situation is far from ideal.No real recovery in sight“, sentence.
