German recession could be ‘even worse than feared’, economists warn

Germany’s economic prospects darkened on Thursday when a new forecast by leading economists predicted the country’s recession could be “even worse than feared”.

According to five economic institutes, Europe’s largest economy will shrink by 0.6 per cent this year, worse than the -0.4 per cent European Commission forecast.

“The most important reason for this revision is that industry and private consumption are recovering more slowly than we expected,” said Prof Oliver Holtemöller of the Halle Institute for Economic Research, one of the forecast’s authors. Among the challenges they flag are a rough global economy, in particular with Germany’s key trading partner, China.

Also causing difficulty: weakness in manufacturing and the impact of record euro zone interest rates amid ongoing inflation challenges triggered by Russia’s invasion of Ukraine. Data shows Germany’s economy fell into recession around the start of the year and stagnated further in the second quarter. The IMF has predicted that Germany will be the only major advanced economy to shrink this year.

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In a spark of hope on Thursday, official statistics showed Germany’s inflation rate dropped to 4.5 per cent year-on-year this month, its lowest level since February 2022 and down from 6.1 per cent in August.

“The abrupt drop in inflation is an important signal for the success of the fight against inflation,” said Dr Fritzi Koehler-Geib, chief economist at the state KfW bank.

Germany’s inflation halt will be a cause of relief at the European Central Bank (ECB). Its governing council may interpret the news as a reason to hit pause on its recent interest rate hikes at its next monetary policy meeting on October 26th.

ING chief economist Carsten Brzeski said the German data made a strong case for an interest rate breather even if euro zone inflation remains well above the ECB’s two-per cent target.

“Confidence continues to weaken and inflation has come down, even though it is still nowhere near levels that would bring relief or comfort to the central bank,” he said.

Meanwhile, Volkswagen announced on Thursday morning that it had largely resolved an IT outage that caused a production standstill on Wednesday afternoon. VW factories were affected in Germany and worldwide, as were plants at its Audi and Porsche subsidiaries in the US and China.

The motor group insisted the worst computer crash in its corporate history was not caused by a hacker attack but by “unusual data packets” that replicated themselves across its corporate servers at its Wolfsburg headquarters. While that system remained partially offline on Thursday, most of its factories were up and running again.