Germany’s recession will get worse – survey

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Business sentiment in Germany worsened in June, marking a second consecutive month of declining expectations. The country likely faces a longer recession than initially predicted, according to a survey published on Monday.

The business climate index for the EU’s largest economy dropped to 88.5 this month from 91.5 in May, a deeper-than-expected decline, according to Munich’s Ifo institute for economic research.

“Sentiment in the German economy has clouded over noticeably,” Ifo president Clemens Fuest said.

The country faces the prospect of a longer recession as domestic demand and exporters’ expectations have both weakened, Klaus Wohlrabe, head of Ifo surveys, told Reuters.

The German government predicted that the country’s gross domestic product would grow by 0.4%, up from its January expectations of 0.2%, but economists believe the forecast will now have to be revised downwards.

“The probability has increased that gross domestic product will also shrink in the second quarter,” Wohlrabe said.

The Ifo survey revealed the largest monthly deterioration in manufacturing, which came in combination with a slower rise in business activity in the service sector.

“It is clear that industry remains under pressure from waning demand, in line with Friday’s PMIs which saw industry in the Eurozone’s biggest economy deep in contractionary territory amid rapidly shrinking backlogs and destocking,” said Mateusz Urban, senior economist at Oxford Economics.

Meanwhile, the Bundesbank stated on Monday that the recession in Germany would end soon and it expects GDP to rise slightly in the second quarter of 2023. Likewise the fall in private consumption “should bottom out,” according to the German central bank. 

Analysts, however, sound less upbeat. Franziska Palmas, senior Europe economist at Capital Economics, said that “the slump in the German Ifo, together with the drop in the PMIs, suggests that German GDP probably contracted for the third quarter in a row in the second quarter.”

The research firm expects the German economy to remain in recession throughout 2023, as does Commerzbank’s chief economist Joerg Kraemer. “We feel confirmed in our forecast that the German economy will shrink again in the second half of the year,” he warned.

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