A looming recession on the horizon of Germany

Germany’s Ifo Institute for Economic Research predicted that the country’s economy will stagnate in 2024, despite a stronger-than-expected start to the year, and will still lag behind its European counterparts.

According to the institute’s latest forecast, manufacturing and construction in particular remain mired in recession.

Consumption will be the only bright spot, as it will rebound as inflation subsides.

According to Michael Grömling, Head of Macroeconomic and the Business Cycle Research Unit at Ifo said, “This isn’t enough to achieve a real recovery, and in addition to consumption, investments must start at the end; Huge gaps in investment have now developed”.

Investment is suffering from a recession due to the geopolitical situation and high interest rates that make financing more expensive.

Germany’s economy contracted 0.2% last year, the weakest performance among major euro zone economies, as high energy costs, lackluster global demands and record high interest rates weighed on them.

Ifo expects 0% growth for Europe’s largest economy this year, again lagging behind France, Italy, Britain and the United States, all of which are expected to expand.

At the beginning of this year, Germany avoided a recession, growing 0.2% in the first quarter, compared to the previous three-month period, according to revised figures.

In the last quarter of 2023, the economy contracted by 0.5%.

The German government expects GDP growth of 0.3% this year.

Grömling said, “What is needed is a political push that improves business conditions; If nothing changes, we will continue to waste our potential”.

The Ifo Institute estimates that foreign trade will remain weak and will provide little economic stimulus this year.

Germany’s unemployment rate is likely to rise to an average of 6% this year, up from 5.7% in 2023, according to the institute.

“Despite the record number of 46 million people working on average in 2024, the effects of a weakening economy on Germany’s labour market are becoming more apparent,” Grömling added.

Data from the Federal Statistical Office showed on Wednesday that German industrial production fell in March, but came in less than expected thanks to the construction sector.

Industrial production fell 0.4% from February, down less than Reuters’ 0.6% forecast.

Francesca Palmas, chief European economist at Capital Economics, said the renewed contraction in industrial production in March after two months of expansion was a reminder that the German economy was still struggling.

Palmas expects industrial production to rise slightly during the year, but remain below previous levels.

The statistics bureau showed that the less volatile three-month versus three-month comparison showed that production rose 1% from January to March, compared to the previous three months.

Production rose 1.7% in February month-on-month, down from 2.1% before the data was reviewed.

Carsten Przeski, head of global macroeconomics at ING, said, “The cyclical decline is over and optimism is back; However, the road to a significant recovery, especially in industry, remains long”.

Demand in the manufacturing sector remains weak. Data showed Monday that German manufacturing orders fell 0.4% month-on-month in March, following the seasonal and calendar adjustment.

The Ifo survey showed that 39.5% of manufacturers reported no orders in April, up from 36.9% in January.

Klaus Volrabe, head of surveys at Ifo, said the shortage of orders was hindering Germany’s economic development.

Commerzbank’s chief economist, Ralph Solvin, said that in light of weak orders, he expects output to decline in the coming months.

However, a recovery is expected in the second half of the year, according to Solvin.

Production in the manufacturing sector – excluding energy and construction – fell 0.4% month-on-month.

Destatis data showed there was a 4.2% month-on-month decline in energy production in March, while production in the construction sector grew 1%, compared to the previous month.