German economic slump will be worse than feared, warn economists

German Chancellor Olaf Scholz
Chancellor Olaf Scholz has previously blamed Germany's stalled economy on decades of ‘timid bureaucracy’ - CLEMENS BILAN/Shutterstock

Germany’s slump will be deeper than previously feared, economists have warned, as the industrial powerhouse struggles with an energy crisis and disruption to supply chains.

Despite forecasts showing the country will dodge a recession, a group of influential economic institutes told the German Government that stagnation will continue.

Germany’s GDP is set to fall by 0.6pc this year, according to the latest forecasts, a significant reduction on the 0.3pc growth rate previously predicted in spring.

The year started with a winter recession in Germany which ended as the economy held flat in the three months to June.

It is now shrinking again with a contraction of 0.4pc expected in the third quarter, although the country will avoid a recession if it hits forecasts of 0.2pc growth in the final three months of the year.

Oliver Holtemöller at the Halle Institute for Economic Research said the recovery from the energy crisis has been painfully weak.

He said: “The most important reason for this revision is that industry and private consumption are recovering more slowly than we expected in spring.”

Growth will reassert itself next year, he added, albeit at the underwhelming pace of 1.3pc, rising to 1.5pc in 2025.

Carsten Brzeski, economist at ING, said there is “resounding” evidence Germany is once more “the sick man of Europe”.

He said: “Cyclical headwinds like the still-unfolding impact of the European Central Bank’s monetary policy tightening and high inflation – plus the stuttering Chinese economy – are being met by structural challenges like the energy transition and shifts in the global economy, alongside a lack of investment in digitalisation, infrastructure and education.

“To a large extent, Germany’s issues are homemade. Supply chain frictions in the wake of the pandemic, the war in Ukraine and the energy crisis have only exposed these structural weaknesses. These deficiencies are the flipside of fiscal austerity and wrong policy preferences over the last decade.”

Germany’s falling inflation

One positive sign is inflation is falling rapidly in Germany, which will ease pressure on households.

Consumer prices this month are up 4.5pc year-on-year, according to official estimates from the Federal Statistical Agency.

This is a sharp slowdown from August’s 6.1pc inflation rate and represents the slowest rise in prices since February 2022, when Russia invaded Ukraine.

Energy prices rose 1pc on the year, down from the 8.3pc annual increase recorded last month.

Food price inflation slowed from 9pc to 7.5pc, while goods and services fell to 5pc and 4pc respectively, indicating a widespread slowdown in cost pressures.

At the same time, business and consumer confidence surveys by the European Commission showed the fifth consecutive decline in sentiment across the eurozone.

The headline economic sentiment indicator edged down from 93.6 to 93.3, the lowest since the depths of the pandemic. The long-term index average is 100.

Rory Fennessy, of Oxford Economics, said it “could herald a third-quarter contraction” in the eurozone economy.

He said: “Continuing weakness in industry and slowing services momentum means that the eurozone economy is increasingly likely to contract in the third quarter, albeit with a lot of country divergence.

“Even if the eurozone avoids a contraction, growth in the second half will still be incredibly weak.”

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