Newly released data has confirmed earlier assessments that Germany effectively exited its recession in the second quarter. The revised statistics affirm that the country’s economy encountered a period of stagnation rather than contraction in the three-month interval concluding in June.
Germany’s economic growth has been in stagnation
Data released indicate that output remained stagnant during the three months ending in June, aligning with the initial estimate and median forecast. The reasons behind this stagnation include sluggish global growth, which led to a decline in German exports, a significant downturn in manufacturing, and consumers being impacted by high inflation and the aggressive interest rate hikes implemented to restore it to the 2% target.
The report is unlikely to alleviate concerns about the extended period of weakness that Europe’s largest economy, once the growth engine fueled by trade in the region, is currently facing. Germany is the sole major country projected to contract this year, and the outlook remains gloomy.
Carsten Brzeski, ING’s Head of Macro, expressed that the German economy appears caught between stagnation and recession. He also highlighted that recent sentiment indicators do not bode well for economic activity in the upcoming months.
The industrial sector experienced its worst performance in six months in June, and factory orders, which indicate future activity, saw a minimal increase in the second quarter. This week, more indicators of weakness emerged as S&P Global’s Purchasing Managers’ Index for August dropped to 44.7, marking the lowest point in over three years—additionally, services contracted for the first time in eight months.
German companies are sounding cautionary notes
A survey conducted by S&P highlighted similar challenges within the 20-nation euro area, leading investors to speculate that the European Central Bank (ECB) might halt its unprecedented campaign of rate hikes next month.
Bundesbank President Joachim Nagel, speaking in an interview, expressed that considering inflation remains above 5%, it is “much too early” to contemplate a pause. He also refuted claims that Germany is regressing to being the “sick man of Europe,” emphasizing the adaptive capability of the German economy and expressing cautious optimism despite the current complexities.
Nevertheless, German companies are sounding cautionary notes. Hamburger Hafen, for instance, witnessed a notable reduction in shipping volumes that persisted into the second quarter. The company cautioned about an anticipated “significant decrease” in revenue within its Port Logistics division. Factors such as Russia’s involvement in Ukraine, geopolitical tensions, inflation, and rising interest rates have all exerted pressure on consumer and industrial demand, hindering the global economic rebound.
Siemens AG faced earnings below analyst predictions due to reduced demand for its digital industries unit in China. Similarly, Salzgitter, one of Europe’s major steel producers, reported weaker-than-expected results and projected that output would be less robust in the latter half of the year than the first.
The Bundesbank on the other hand recently stated that the economy will likely stagnate in the current quarter as elevated interest rates and subdued global demand continue to impact manufacturing. However, a resilient labor market, substantial wage growth, and moderating inflation are expected to bolster consumer spending.
From April to June, private consumption remained flat after declining in the preceding two quarters. Gross investments expanded by 2.1%, while exports experienced a decline of 1.1%.
Meanwhile, Germany’s Ifo Institute is scheduled to release its latest business-confidence index later, with economists anticipating a fourth consecutive decline. Clemens Fuest, the institute’s head, speculated last month that the economy might still be recessionary.