Germany on the Brink of a Recession

While most of Europe has struggled to achieve any meaningful economic growth in recent years, Germany was a notable exception, recording relatively strong rates of growth thanks to the ability of German exporters to sell their products outside of the depressed Eurozone.  However, the German economy crashed to a halt in the second quarter of this year and recent data suggests that the economic situation in Germany has continued to worsen in recent months.  As a result, Germany is on the brink of its third recession since the global financial crisis and this could have major ramifications for the rest of Europe.

Over the past weeks and months, the economic data coming out of Germany has been highly disturbing.  It started when it was revealed that the German economy had surprisingly shrunk by 0.2% in the second quarter when compared with the first quarter.  Then, it was revealed that German manufactured orders had fallen by 5.7% month-on-month in August of this year.  Furthermore, industrial production in Germany fell by 4.0% month-on-month in August, its largest decline in more than five years.  With export demand in the Eurozone remaining very weak, and with demand in China growing at a slower pace than expected, Germany’s export machine has been severely weakened in recent months.

This run of poor economic results has raised the likelihood that the German economy shrank again in the third quarter of this year, placing Germany back in a recession.  Moreover, given the fact that Germany had been the driver of growth within the Eurozone and that other key Eurozone economies such as France and Italy remain very weak, there is a very good chance that the Eurozone as a whole will also fall into a recession over the remainder of this year.  In fact, it is hard to see just where the impetus for growth will come from within the Eurozone over the near-term, particularly given the weak levels of domestic demand within the Eurozone.

Looking further ahead, the German economy is likely to return to growth in 2015, although at a lower rate than in previous years.  On the positive side, the euro is forecast to continue to weaken in the coming months, boosting the prospects for German exports outside of the Eurozone.  Furthermore, demand for German exports in North America and Asia is forecast to rise over the next 12 to 18 months.  On the negative side, domestic demand in Germany is forecast to weaken considerably as demographic pressures hold down domestic demand.  Moreover, Germany’s relative export competitiveness with some other European exporting economies has fallen over the past year, reversing the earlier trend that allowed for Germany to outperform most of its regional rivals.  As such, Germany, like the rest of the Eurozone, is headed for sluggish growth in the years ahead.