A respected German think tank has predicted that Germany will fall into a recession in the third quarter and has slashed its 2020 growth forecast for Europe’s biggest economy.
The Ifo Institute today predicted the German economy will shrink by 0.1 per cent in the third quarter, causing it to fall into a technical recession after shrinking by 0.1 per cent in the second quarter.
Ifo also dramatically downgraded its growth forecast for the country in 2020, saying that the malaise in the economy will continue into next year.
It now thinks the German GDP will grow by 1.2 per cent in 2020, 0.5 percentage points lower than its previous prediction of 1.7 per cent growth.
The institute also downgraded its 2019 growth forecast for Germany to 0.5 per cent, down from a previous forecast of 0.6 per cent.
“Like an oil slick, the weakness in industry is gradually spreading to other sectors of the economy, such as logistics, one of the service providers,” says Timo Wollmershaeuser, head of forecasts at Ifo.
Wollmershaeuser added that things could be even worse than his institute has predicted. “We are assuming that there will be no hard Brexit or escalation of the US trade war,” he said.
“Meanwhile, the weakness of the economy has left its mark on the labour market,” Wollmershaeuser added.
The German economy had been kept afloat in the first quarter of the year by strong domestic demand driven by lower unemployment and pay rises.
Yet this now looks to have ended. “The previously strong growth at private service providers and in the construction industry came to a standstill this summer,” Wollmershaeuser said.
“Unemployment has risen for the fourth consecutive month, and the proportion of companies that have reported short-time work has increased significantly.”
Germany is considering a “shadow budget” to boost its economy without breaking its own strict spending rules, according to Reuters.
Under the plans, it could set up independent public agencies to invest in the country’s struggling economy to get round its so-called black zero rules that say there must be a budget surplus.
The Ifo Institute said that due in large part to an expansion of state transfer payments, the German government’s financial surplus will “crumble” from €45.8bn (£43.4bn) this year to €23.1bn in the coming year.