German Economy Autumn 2019 - Germany at the brink of recession

Martin Ademmer, Jens Boysen-Hogrefe, Salomon Fiedler, Dominik Groll, Nils Jannsen, Stefan Kooths, Galina Potjagailo and Maik Wolters

No 59, Kiel Institute Economic Outlook from Kiel Institute for the World Economy (IfW Kiel)

Abstract: The German economy is at the brink of a recession. Gross domestic product is likely to decline again in the third quarter. Germany would thus formally be in a technical recession. However, the slowdown that began in 2018 has so far been a normalization of the previous boom period. At present, capacity utilization of firms is roughly in line with their long-term average. A pronounced recession would occur if capacity utilization were to fall noticeably further. Risks for such a recession have increased, especially as the weakness in the manufacturing sector is increasingly having an impact on the service sector. At present, however, it seems more likely that the German economy will pick up slightly in the coming year. Overall, we now expect lower growth rates for gross domestic product of 0.4 percent for the current year and 1 percent for 2020 compared to our summer forecast (0.6 and 1.6 percent, respectively). So far, the downturn has been characterized by the fact that economic momentum in Germany has cooled off more than in many other countries. To some extent, this is due to the fact that the German economy had previously been in a pronounced boom, and thus the height of fall was higher than elsewhere. In addition, the high level of political uncertainty worldwide, resulting primarily from the ongoing trade conflicts, is likely to weigh particularly on production in Germany. Against this backdrop, exports are likely to pick up only gradually. Private consumer spending will continue to expand at robust rates. Though the weaker economy is having a noticeable effect on the labor market-the number of unemployed will probably continue to rise for the time being and employment will fall in the coming year for the first time since the Great Recession-, disposable household income is set to rise with robust rates, not least because labor shortages will continue to contribute to quite strong wage increases and because several fiscal measures will support incomes. Business investment, on the other hand, is likely to be clearly on the downside temporarily due to the pessimistic sales outlook. Government surpluses will decline noticeably in the forecast period, as expenditure will continue to expand strongly, while revenues will be burdened by the economic slowdown. In 2021, the public budget balance will thus probably be negative for the first time since 2011.

Keywords: business cycle forecast; stabilization policy; leading indicators; outlook (search for similar items in EconPapers)
Date: 2019
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