Germany recession: Bundesbank sees grim future as inflation starts ravaging Europe’s largest economy
With no signs of the Russia-Ukraine war deescalating in the near term, Germany's central bank, the Bundesbank, said the nation’s real gross domestic product (GDP) is set to shrink for three straight quarters from July 2022 to March 2023.
Is recession in Europe's biggest economy imminent? In this article we talk about factors that could indicate a possible Germany recession, along with a German economy forecast for the near term.
What is a recession?
While a recession typically describes a period of decline in economic output, it has no official definition.
Economists have differed in their views when defining a recession as there have been numerous occasions when economies have undergone less intense and short-lived periods of economic contraction.
The most widely quoted and well-defined explanation of recession is from Geoffrey Moore, of the National Bureau of Economic Research, which is as follows:
Going by this definition, an economy is said to technically be in a recession if its real GDP contracts for two consecutive quarters. This is also known as a technical recession.
Is Germany in a recession right now?
Let’s look at the quarterly GDP growth rate data published by Eurostat to see whether a recession in Germany has begun.
Germany posted quarter-on-quarter (QoQ) real GDP growth of 0.8% in the September 2021 quarter, after which real GDP growth rate came in flat in the quarter ended December 2021.
In 2022, the economy of Germany grew 0.8% QoQ in the three months ended March 2022. The latest Eurostat data for the June 2022 quarter showed that Germany’s real GDP inched 0.1% higher over the previous quarter.
The economic data showed Germany did not enter a technical recession, as of June 2022.
Eurostat is expected to report preliminary flash GDP estimates for the September quarter on 31 October 2022.
Russia-Ukraine war and European energy crisis
Europe has suffered more than the rest of the world in its fight against inflation due to its over-dependence on Russian energy imports. Historical data compiled by Eurostat showed Russia was the biggest exporter of natural gas and crude oil to the European Union (EU) in 2020.
Today, hostilities between Russia and Western nations following Russia’s invasion of Ukraine in February 2022 have led to an energy supply crisis in Europe.
Nord Stream 1, a natural gas pipeline operated by Russian state-owned company Gazprom that runs from Russia to Germany, has seen multiple shutdowns in 2022, sending energy prices soaring in the EU.
With winter months approaching amid “extremely tight” gas supply and no signs of the Russia-Ukraine war ending, the outlook looks bleak for European households and industries who may be forced to reduce energy consumption in order to manage limited supplies.
Adding to concerns was Russia’s President Vladimir Putin’s announcement of a “partial mobilisation" that could call upon an additional 300,000 reservists to serve in the war.
Analysts at research firm S&P Global expected Russian aggression to be met with harsh economic sanctions in December, which could have a “major impact” on commodity supplies and prices.
In a bid to reduce its dependence on Russian energy imports, European authorities have been actively increasing diplomatic ties with natural gas suppliers like Norway, Azerbaijan and Egypt to lock in new gas supply for the winter, said S&P Global in a separate note.
To meet Germany’s energy needs, the county, Europe’s biggest energy consumer, has turned to crude oil from Canada, Algeria, Saudi Arabia, Cameroon and Libya.
Germany’s inflation remains elevated
While inflation in most parts of the world has shown signs of easing, the latest inflation data revealed that Europe recorded its fastest pace of annualised price growth ever in August 2022 at 9.1%
Despite the recent fall in crude oil prices to below $100 a barrel, energy items were the biggest contributors of European inflation in August, followed by food, alcohol and tobacco and services.
Adding to the worries was core inflation data, which includes volatile items like energy and food prices, showing no signs of easing. Core inflation in Europe scaled a fresh peak of 5.5% in August 2022.
Inflation in Germany, as measured by the Harmonised Index of Consumer Prices, increased at an annualised rate of 8.8% in August 2022, higher than its previous peak of 8.7% recorded in May 2022. The Bundesbank noted in its September report:
Headline inflation in Germany has increased at a rate of over 8% for four consecutive months since May. The bank added:
ECB raised interest rates for the first time since 2011
The European Central Bank (ECB) has been among the most dovish global central banks in 2022. The ECB maintained its negative interest rate regime until July 2022.
The ECB hiked rates for the first time in over a decade in late-July as it implemented a 50 basis points (bps) rate hike to take policy rates from negative 0.5% to 0%.
The central bank followed that by hiking its policy rates by 75bps on 8 September, its single largest rate hike since the formation of the European monetary union, according to ING.
Following the historic rate hike, Carsten Brzeski, global head of macro at ING, was sceptical about how “monetary policy can bring down inflation that is mainly driven by (external) supply-side factors”, according to the recent note:
The ECB will have to balance hiking rates to control inflation without hampering economic growth in Germany and other EU nations.
Germany recession outlook for 2022 and beyond
The Bundesbank said in a mid-September update that the German economy is seeing “mounting signs” of sliding into a recession.
According to the Bundesbank, the real GDP of Germany is likely to decrease in the September quarter and is seen shrinking significantly in the final quarter of 2022 and the first quarter of 2023, noting:
Having seen the Euro Area Purchasing Managers' Index (EA PMI) enter contraction territory in September, ANZ Research said in a note:
The ECB said in its September report that it expected the real GDP growth to “slow down significantly in the third quarter” due to inflation pressures and rising interest rates:
Finally, the International Monetary Fund (IMF) expected Germany’s real GDP to grow at 1.2% in 2022 and fall to 0.8% in 2023.
When looking at Germany recession forecasts, it’s important to bear in mind that analysts’ forecasts can be wrong. Forecasts shouldn’t be used as a substitute for your own research.
Always conduct your own due diligence. Remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and investment goals. And never trade money that you cannot afford to lose.
Is Germany in a recession?
In 2022, the German economy grew 0.8% QoQ in the three months ended March 2022. The latest Eurostat data for the June 2022 quarter showed that Germany’s real GDP inched 0.1% higher over the previous quarter. The economic data showed Germany did not enter a technical recession, as of June 2022.
How did the 2008 recession affect Germany?
Historical data showed Germany’s annual GDP rate grew by 1% in 2008 and fell by 5.7% in 2009.
When was Germany's last recession?
Germany's last recession started in late 2008 following the financial crisis of 2008. It lasted for over a year till early 2010.