Germany is threatened with a prolonged recession

Berlin, Washington The economic prospects in Germany continue to deteriorate. In the new growth outlook of the International Monetary Fund (IMF), the German economy is the only one of the 22 countries and regions examined in which gross domestic product is expected to fall in 2023.

The IMF expects a drop of 0.3 percent, as the Washington organization announced on Wednesday. Even in 2024, Germany will hardly be able to compensate for the deficit. The IMF then expects GDP growth of 1.3 percent.

The German economy slipped into recession in the winter months. Economic output had shrunk for two quarters in a row. Afterwards, most economists had expected a small upswing. But there is increasing evidence that even that is missing. The period of economic stagnation threatens to stop.

Next Friday, the Federal Statistical Office will give an initial estimate for the second quarter. More and more experts are expecting another minus.

There may also be no improvement in the third quarter that has just started. “The probability that the economy will find itself in a recession in the second half of the year has increased,” says Cyrus de la Rubia, chief economist at Hamburg Commercial Bank (HCOB).

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Several leading indicators, including the purchasing managers’ index, are fueling concerns about a permanently weak economy.

(Photo: dpa)

The IMF sees the continuing weak phase as being primarily caused by industry. This is reflected, among other things, in the orders. In May, for example, the backlog of orders in German industry melted for the third month in a row. The order backlog in the manufacturing sector fell by 0.5 percent compared to the previous month, as the Federal Statistical Office announced last week.

>> Read here: Ifo business climate index falls more than expected

“So far, industry has been particularly disappointing, because despite dwindling supply chain problems, production is still stagnating,” says Fritzi Köhler-Geib, chief economist at the state-owned KfW Bank.

According to the IMF, in addition to the weak global economy and rising interest rates, Germany is burdened by competitive disadvantages due to energy costs. Although the prices for electricity, oil and gas are falling, they are still higher in Germany than in most other countries.

Leading indicators drop significantly

The Ifo business climate index feeds the concerns. This fell to 87.3 points in July, after 88.6 points in June. It is the third decline in a row. The Ifo regularly surveys 9,000 German company managers for the barometer.


Companies were noticeably more dissatisfied with current business in particular. Expectations also dropped again. “The situation in the German economy is getting darker,” said Ifo President Clemens Fuest.

According to the Ifo, the business climate has deteriorated in all sectors. In industry, for example, the utilization of factories and machines fell by 1.4 percent, mainly because of the decreasing orders. In construction, the business climate indicator has fallen to its lowest level since February 2010.

The Purchasing Managers’ Index had previously been weak. In addition to company bosses, the financial service provider S&P Global also surveys purchasing managers of companies, so that there is a stronger focus on price developments and warehousing.

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The index for the entire German private sector – industry and service providers together – fell by 2.3 to 48.3 points in July.

>> Read here: Purchasing managers’ index falls surprisingly sharply

For the first time since January, the barometer is below the threshold of 50 points, from which it would signal growth.

Not only is it the third straight decline, it’s also the worst reading in eight months. “This is a bad start to the third quarter for the German economy,” said HCOB economist de la Rubia.

World Economy: Slightly improved

With its weak prospects, Germany is thus moving against the trend. In its new forecast, the IMF sees positive signals for the global economy, even if global growth remains “weak by historical standards”. However, the supply chains have “largely recovered” and the service sector is robust.

>> Read here: Is the US now leaving China behind?

Overall, the IMF is adopting a slightly more optimistic tone than it was in the spring. “Better outcomes for global growth have become increasingly plausible,” says the updated economic outlook, especially if core inflation rates “fall faster than expected” and energy prices fall further.

Global growth is expected to fall from 3.5 percent last year to 3.0 percent in 2023 and 2024. Compared to the April forecast, however, this is a slight improvement of 0.2 percentage points for the current year.

However, the global economy is still not coming close to the growth figures of the noughties. The IMF forecasts a decline in growth for 93 percent of the economies in the current year.

Euro zone: new winners

For the euro zone, the IMF forecasts growth of 0.9 percent this year and 1.5 percent next year. The forecast remains largely unchanged.

However, the situation in the individual states is changing. While Germany slips further into the red, the fund is raising its growth forecast for tourism-heavy countries such as Italy (up 0.4 percentage points) and Spain (up 1.0 percentage points).

USA: Biden boom weakens

The US can expect slower growth in 2024 when the country holds presidential elections. Although the IMF is correcting its US forecast for 2023 by 0.2 percentage points, growth is now estimated at 1.8 percent.

But the relatively stable economy is “not going to last,” the fund emphasizes. In the coming year, US growth is expected to weaken and only reach one percent.

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