While Germany is barely coming out of a recession recorded in Q4 2022 and Q1 2023, economic surveys emphasise the risk that the country will fall back into recession in H2. The deterioration identified by IFO’s business climate is clear (85.7 in August, returning to its low level of October 2022), both in industry and services. In the ZEW survey, the current business conditions indicator fell to -79.4 in September. In the past, such a level has always resulted in negative growth.
Household confidence, measured by the GFK index, has stabilised at a historically low level for five months. In September, it is approaching -25.5, the same level it was in May. Although it has recovered from its low of -42.8 (October 2022), driven by a fall in inflation, it remains very deteriorated compared to its average pre-Covid level (+6 between 2001 and 2019). In addition, the proportion of households deeming a significant purchase in the immediate future appropriate continues to fall, reaching an all-time low in August 2023 at 5.8% (according to the European Commission). This deterioration should weigh on household consumption, while it was already 2% below its pre-Covid level in Q2.
The latest data showed a stabilisation of inflation at a still high level (6.4% y/y in August 2023, compared to 6.3% in May), highlighting the lack of momentum, at this stage, in the direction of disinflation beyond energy and food prices. Inflation in services has therefore exceeded 5% since June (5.1% in August), a first since the country’s reunification.
With 42,000 jobs created in Q2 2023 (after two quarters at over 100,000 net jobs created), the loss of momentum is more pronounced on the labour market side than on the inflation side. The IFO survey’s employment climate fell to 97 in August, a level that had not been reached since June 2010 (excluding the Covid period), suggesting a further slowdown.
Given these negative factors, we expect a GDP contraction in Q3 and Q4 (-0.1% q/q each time). After a recession at the turn of 2022-2023 and zero growth in Q2 2023, the economy is going through a prolonged period of underperformance, with Germany being one of the few countries where GDP is below its level before the start of the war in Ukraine (-0.2% between Q1 2022 and Q2 2023).
Stéphane Colliac
