ifo Institute: Recession on the Horizon for Germany

The ifo Institute has lowered its forecast for economic growth in Germany this year and next. Instead of 0.6 percent, researchers now expect only 0.5 percent growth for 2019. “The German economy is at risk of falling into recession. Like an oil slick, the weakness in industry is gradually spreading to other sectors of the economy, such as logistics, one of the service providers,” says Timo Wollmershaeuser, Head of Forecasts at ifo. “This outlook is associated with high uncertainties. For example, we are assuming that there will be no hard Brexit or escalation of the US trade war.”

The economy contracted in the second quarter by 0.1 percent, and ifo anticipates another decline of 0.1 percent in the third quarter. “Technically speaking, that would be a recession,” Wollmershaeuser says. A slight recovery in the fourth quarter added to the strong increase of 0.4 percent achieved in the first quarter should then result in growth of 0.5 percent for the year as a whole.   

“This downturn was triggered by a series of world political events that call into question a global economic order that has grown over decades,” Wollmershaeuser says. The outlook for the coming year became darker as well: to date the ifo Institute had expected 1.7 percent growth, but has now scaled that back to just 1.2 percent; adjusted for the high number of working days in 2020, that comes to only 0.8 percent. For the first time, researchers are now estimating 1.4 percent for 2021.  
 
“Meanwhile, the weakness of the economy has left its mark on the labor market,” Wollmershaeuser adds. While employment in manufacturing has been falling since the spring, the previously strong growth at private service providers and in the construction industry came to a standstill this summer. Unemployment has risen for the fourth consecutive month, and the proportion of companies that have reported short-time work has increased significantly. For 2020, the ifo Institute expects unemployment figures to rise to 2.313 million, up from 2.275 million this year. However, the number of persons in employment will continue increasing slowly, rising from 45.2 million this year to 45.4 million in 2020 and then to 45.5 million in 2021.
 
Support for the economy is coming from strong growth in private household income, which is the result of hefty wage increases and an expansion of state transfer payments. The German government’s financial surplus will crumble from EUR 45.8 billion this year to EUR 23.1 billion in the coming year, falling further to EUR 18.6 billion in 2021. Over that same period, the much criticized current account surplus (exports, imports, services, transfers) will rise from EUR 245 billion to EUR 258 billion before reaching EUR 265 billion in 2021. Those figures represent 7.1 percent of economic output this year, 7.3 percent in the coming year, and 7.2 percent in 2021.