Germany at the brink of recession

The German economy is at the brink of a recession. Gross domestic product is likely to decline again in the third quarter. Germany would thus formally be in a technical recession. However, the slowdown that began in 2018 has so far mainly been a normalization of the previous boom period. At present, capacity utilization of firms is roughly in line with their long-term average. A pronounced recession would only occur if capacity utilization were to fall noticeably further. Risks for such a recession have increased, especially as the weakness in the manufacturing sector is evidently increasingly having an impact on the service sector. At present, however, it seems more likely that the German economy will pick up slightly in the coming year. Overall, we now expect lower growth rates for gross domestic product of 0.4 percent for the current year (summer: 0.6 percent) and 1 percent for 2020 (summer: 1.6 percent) than our forecast from the summer. So far, the downturn has been characterized by the fact that economic momentum in Germany has cooled off more than in many other countries. The fact that the German economy had previously been in a pronounced boom, and thus the height of fall was higher than elsewhere, probably contributed to this. In addition, the high level of political uncertainty worldwide, resulting primarily from the ongoing trade conflicts, is likely to weigh particularly heavily on production in Germany. Against this backdrop, exports are likely to pick up only gradually. Private consumer spending will continue to expand at robust rates. Though the weaker economy is having a noticeable effect on the labor market—the number of unemployed will probably continue to rise for the time being and employment will fall in the coming year for the first time since the Great Recession—, disposable household incomes will set to rise in a robust pace, not least because the labour shortage will continue to contribute to quite strong wage increases and several fiscal measures will support incomes. Business investment, on the other hand, is likely to be clearly on the downside temporarily due to the pessimistic sales outlook. Government surpluses will decline noticeably in the forecast period, as expenditure will continue to expand strongly, while revenues will be burdened by the economic slowdown. In 2021, the net lending/net borrowing of public budgets will thus probably be negative for the first time since 2011.