Recession remains inevitable
The flash estimate of German GDP growth, which will be released on Friday, is highly likely to show that the German economy dropped into contraction in the third quarter. While the services industry benefitted from a post-lockdown boost over the summer months, shrinking order books, high energy and commodity prices and low water levels strongly weighed on economic activity.
Looking ahead, today’s Ifo index reading suggests that at least business sentiment is forming a trough. This, however, does not mean that any improvement in the economy is near. Even if the weather has brought some relief to the German economy, as the rainfall increased water levels and the warm October weather has postponed the start of the heating season, the gradual sliding into recession continues. Companies and households are increasingly suffering under higher energy invoices and ongoing high inflation, adjusting consumption and investments. The government’s latest support package, if not implemented retroactively, will be too little too late to prevent a winter recession. It will only be able to soften such a recession.
Leaving short-term and cyclical developments aside, we again reiterate that the German economy is in the middle of a complete overhaul. The war in Ukraine has probably marked the end of Germany’s very successful economic business model: importing cheap (Russian) energy and input goods, while exporting high-quality products to the world, benefitting from globalisation. The country is now forced to accelerate the green transition, restructure supply chains, and prepare for a less globalised world. And these things come on top of well-known long-standing issues, such as a lack of digitalisation, tired infrastructure, and an ageing society, to mention a few. All of this means that even after the winter recession, no matter how severe it will be, growth will be subdued for a while.
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