Germany heading for recession as crisis in the eurozone escalates

The once-mighty German economy is heading for recession as the crisis in the eurozone escalates.

Output in Germany – recently dubbed the ‘sick man of Europe’ having for a long time been its driving force – rose by just 0.1 per cent in the second quarter of the year.

And the respected Ifo economic institute said it now expects the German economy to shrink by about 0.5 per cent in the current third quarter with little prospect of a rebound at the end of the year.

That would plunge Germany into recession, which is defined by two consecutive quarters of decline.

Carsten Brzeski, an economist at ING, said: ‘The list of arguments why the German economy is sliding into recession is getting ever longer. 

The question isn’t about whether there’ll be a recession, but rather how severe and how long it will be.’

Commerzbank chief economist Joerg Kraemer added: ‘We expect the second half of the year and the first quarter of next year to be more recessionary than ever.’

Separate figures this week showed the French economy also stumbling, with the wider eurozone at risk of being dragged into the recession.

The bleak outlook has seen the euro plunge to below parity with the dollar, with the single currency languishing just above $0.99 against the greenback.

In a further setback for the global economy, official figures confirmed the US was in recession in the first half of the year. 

Output in the world’s largest economy shrank at an annual rate of 0.6 per cent in the second quarter following a 1.6 per cent slump in the first three months of the year.

The global economy has been rocked by soaring inflation and the war in Ukraine, coming hot on the heels of the pandemic.

Disruption to global supply chains and a slump in trade have been particularly keenly felt by manufacturers in export-orientated Germany. A drop in water levels on the Rhine has also wreaked havoc as river traffic in one of Germany’s most industrialised areas dries up.

At the same time, energy bills are soaring and shortages are on the cards as Russia restricts gas supplies to a country heavily reliant on Moscow for power.

The economy fared better than many feared in the second quarter, eking out some growth despite the gathering storm.

But experts warned the respite will be short-lived.

Thomas Gitzel, chief economist at VP Bank, said: ‘Things could well have been worse. But there is no reason to breathe a sigh of relief. 

The negative factors are currently so great that even a sharp downturn cannot be ruled out. Or, to put another way, a lot of positives would have to happen for a recession not to materialise.’

The Ifo said business morale is at its lowest level since the depths of the pandemic in June 2020 amid high uncertainty due to the Ukraine war, the resulting energy crisis and fears of an economic downturn. ‘Uncertainty among the companies remains high,’ said Ifo president Clemens Fuest.