German Economy Can Avoid Recession? GDP Forecast

Europe is facing an energy crisis, rampant inflation and a clear economic slowdown. Germany as the main and largest economy in Europe and the European Union attracts the attention of not only tourists but also investors.

General outlook

A drop in energy imports from Russia after the invasion of Ukraine sent energy prices soaring in Germany, driving inflation to its highest level in more than 25 years, while fueling fears of a potential gas shortage this winter, even with storage facilities nearly full.

All leading indicators point to a further weakening of the economy in the fourth quarter, with no improvement in sight.

The prices of consumer goods and services are rising at a double-digit rate in Germany, according to the latest data from the local statistical office. CPI inflation rose to 10.4% in October, exceeding economists' forecasts. Inflationary pressures actually extend throughout the economy.

The almost record high inflation in Germany, as in the whole of Europe, was to a large extent caused by a sharp increase in fuel and energy prices (by 43% y/y against 43.9% in September and 35.6% in August). Food prices also accelerated (to 20.3% against 18.7%). Prices of services increased even faster than in previous months (4.0% against 3.6%). In addition, the pressure on price increases was reduced by the reduction of the VAT rate on gas from 19% to 7%.

October flash PMIs for Germany are worse than market expectations. Manufacturing PMI falls to 45.1 in October, lowest since May 2020. Manufacturers saw a deepening decline in new orders due to growing concerns about the economic outlook and high energy costs. Any result below 50 points (neutral level) suggests a recession of the economy. PMI indices show what GDP may look like soon.

The economy continued to thrive despite challenging global economic conditions: broken supply chains, rising prices and war in Ukraine.

GDP forecast

The German economy can surprise GDP growth in the third quarter. However, this does not mean that the country will avoid a recession.

Estimate of third-quarter German GDP growth came in at 0.3% quarter-on-quarter, from 0.1% QoQ in the second quarter. It is too early to be optimistic about the country's economic prospects next year, despite the expected GDP growth.

The official results will be published on Friday, 25 November.

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Source: investing.com

Recession?

Despite not the best forecasts, Germany defends itself against a decline in GDP. This does not mean that the country will avoid recession in the future.

Even though the weather has brought some relief to the German economy as rainfall has raised water levels and warm October weather has delayed the start of the heating season, a gradual recession continues. Businesses and households are increasingly suffering from higher energy bills and persistently high inflation adjusting consumption and investment.

The war in Ukraine probably marked the end of a very successful German business model: importing cheap (Russian) energy and raw materials, while exporting high-quality products to the world, benefiting from globalization. The country is now forced to accelerate its green transition, restructure its supply chains and prepare for a less globalized world. Such a change can be time-consuming and moreover generate more costs.

A sharp decline in German production will help drag the EU into recession this winter. Production across the EU is expected to fall in the current quarter and the first three months of 2023, with Germany experiencing one of the largest drops in activity. Production is important for the German economy and its decline has a significant impact on the economic situation.

Source: investing.com