Germany faces an even LONGER recession than feared as business morale plummets

Germany is likely to face an even longer recession than analysts predicted after a recent survey showed business morale in the country continued to decline for the second straight month.

Munich’s Ifo economic research institute said its business climate index fell to 88.5 this month from 91.5 in May, a sizeable drop of more than 1.5 points more than expected.

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

Germany’s gross domestic product (GDP) fell 0.3 percent in the January-March period, according to figures released last month, embarrassing the German government that had boldly doubled its growth forecast for this year.

The government has forecast GDP growth of 0.4 percent, up from a 0.2 percent expansion forecast at the end of January, a forecast that now probably needs to be revised downward.

It comes as the International Monetary Fund (IMF) was forced last month to admit it had miscalculated its post-Brexit forecast for Britain’s economy, which is now poised to avoid recession despite withdrawal from the EU.

The IMF foundation now expects the UK economy to grow by 0.4% in 2023, despite saying last month that it would contract by 0.3%.

In Germany, the outlook is bleaker, with several economists predicting that its economy will head into a longer recession.

“The fall in the German Ifo, together with the fall in the purchasing managers’ index (PMI), suggests that German GDP probably contracted for the third consecutive quarter in the second quarter,” said Franziska Palmas, senior Europe economist at Capital Economics. .

The economic research firm expects the economy to remain in recession through 2023.

“We feel confirmed in our forecast that the German economy will contract again in the second half of the year,” Commerzbank chief economist Joerg Kraemer said.

And Carsten Brzeski, global head of macro at ING, said: “What is clear is that the optimism of the beginning of the year seems to have given way to a greater sense of reality.”

The economy faces the prospect of a longer recession as domestic demand and exporter expectations have weakened, Klaus Wohlrabe, Ifo’s head of surveys, told Reuters in an interview on Monday.

“It has increased the probability that the gross domestic product will also be reduced in the second quarter,” he said.

Meanwhile, the Bundesbank said on Monday that it believes the recession in Germany will end soon, with gross domestic product rising slightly in the second quarter of 2023.

“Private consumption should bottom out,” German central bank experts wrote in the report.

“Thanks to the strong increase in wages, the real disposable income of private households is stabilizing despite the fact that inflation remains very high.”

But the Ifo survey showed that many sectors of the German economy were concerned about the economic outlook, particularly the manufacturing sector which posted the biggest deterioration in the month.

“It is clear that the industry remains under pressure from declining demand, in line with Friday’s PMIs which saw industry in the euro zone’s largest economy deep into contraction territory amid a rapid reduction in delays and destocking,” said Mateusz Urban, a senior economist at Oxford Economics.