Recession risk looms for Germany as business confidence falls

Economists are warning that Germany risks sliding into recession this winter after the country’s main indicator of business confidence slumped to its lowest point since February and the central bank slashed its growth forecasts.

Germany’s vast manufacturing sector has been hamstrung for months by delays and shortages of materials caused by supply chain bottlenecks. But now its larger services sector is also being weighed down by new restrictions to contain a surge in coronavirus infections.

The worsening outlook for Europe’s largest economy was underlined by the Bundesbank cutting its growth forecasts for this year and next year, while warning output was likely to fall at the end of this year.

The monthly indicator of German business sentiment produced by Munich’s Ifo Institute fell more than most economists expected to 94.7 in December, down from 96.6 the previous month.

“Companies assessed their current business situation as less positive,” said Clemens Fuest, president of Ifo. “Pessimism regarding the first half of 2022 also increased. The German economy isn’t getting any presents this year.” 

Fuest said sentiment declined in the services, retail and construction sectors — including a steep drop in confidence among tourism and hospitality companies. Confidence rose among German manufacturers, but more of them also warned of worsening supply logjams.

Carsten Brzeski, head of macro research at ING, said: “The fourth wave of the pandemic could now actually push the economy to the brink of stagnation, or even into a technical recession.”

However, some economists said a recent rebound in German industrial production, driven by a jump in car production in October, could save the economy from a fall in overall output during the final quarter.

“It is unlikely that fourth-quarter growth will be negative given the momentum you have going into it,” said Sven Jari Stehn, chief European economist at Goldman Sachs.

He added, however, that there were “downside risks” to Goldman’s forecast for German growth of 0.4 per cent in the first quarter of next year — particularly if a stricter national lockdown is introduced to counter the Omicron coronavirus variant, and it lasts longer than expected.

The Bundesbank on Friday cut its German growth forecasts for this year from 3.7 to 2.5 per cent, and for next year from 5.2 to 4.2 per cent. It warned gross domestic product “could fall somewhat” in the final quarter of this year, but would rebound from next spring thanks to a “boom in private consumption”, as well as higher exports and business investment.

Jens Weidmann, the Bundesbank’s outgoing president, said inflation risks were “skewed to the upside” and urged policymakers to be “vigilant”. The central bank raised its forecasts for German inflation, predicting it would increase from 3.2 per cent this year to 3.6 per cent next year, before moderating to 2.2 per cent in 2023.

There was more evidence of supply snags pushing up inflationary pressures, after German producer prices rose 19.2 per cent from a year ago in November — their fastest rate since 1951 — driven mainly by soaring prices for energy, metal and wood products.

The Bundesbank predicted that supply chain bottlenecks would not be resolved until the end of next year.

Both Deutsche Bank and Commerzbank — Germany’s two largest private sector lenders — also warned of a likely recession this winter.

Deutsche Bank forecast the German economy would contract 0.5 per cent in the current quarter and the following one “largely due to the brake on private consumption caused by tightened Covid regulation and voluntary social distancing”.

Jörg Krämer, chief economist at Commerzbank, also forecast German consumer spending would fall in the short term. But he said households had built up extra savings worth 10 per cent of their disposable income during the pandemic, and predicted that “this will strongly boost consumption” once restrictions are lifted, even if only part of it is spent.

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