German economy at risk of recession as GDP contracts

The German economy is at risk of slipping back into recession after growth contracted in the second quarter and measures of consumer confidence continue to fall.

Official figures from Destatis, Germany’s statistics office, confirmed a 0.1 per cent decline in GDP between April and June this year, defying economists’ expectations of an upward revision.

Another quarter of contraction would put Europe’s largest economy back in recession after a similarly weak performance last year.

Germany’s manufacturing sector has been battered by high energy prices and issues with trade links to China since 2022, with high interest rates also weighing on the labour market and consumer sentiment.

A measure of employment in the private sector slumped to the worst level since the 2008-09 financial crisis in August, according to a monthly survey from purchasing managers.

Melanie Debono, senior Europe economist at Pantheon Macroeconomics, said the recession in industry was “reasserting itself after signs it may have been fading in previous months”.

New figures on Tuesday showed that fears over a slowing jobs market are likely to drag down consumer confidence in September. GfK’s monthly survey of households fell to -22 for September from -18.6 the previous month, driven lower by consumer fears over falling real incomes.

“Slightly rising unemployment figures, an increase in company insolvencies and staff reduction plans at various companies in Germany are causing a number of employees to worry about their jobs,” said Rolf Bürkl, consumer analyst at NIM, which helps compile the survey.

Consumer confidence measures are used as an early indicator of growth figures, with the drop suggesting another weak third quarter of growth.

Germany has been one of the worst-performing economies in the European Union over the last two years and signs of prolonged weakness may help push the European Central Bank into another interest rate cut next month.

Traders are betting on another 25 basis-point reduction in the ECB’s three main rates in September, after it loosened monetary policy for the first time in five years. Ratesetters will be closely watching official inflation figures.

Analysts at BNP Paribas said that despite Germany’s weak outlook, they remain “optimistic that the fundamental drivers of the eurozone’s recovery are still in place — namely, improving real incomes and a reducing squeeze from monetary policy.

“However, we share the ECB’s concern about downside risks. Of particular concern was the fact that the PMI employment index for Germany fell further into contractionary territory”.