German Hopes of Avoiding Recession Are Shrinking by the Day

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Germany’s economic prospects are worsening by the day as record inflation haunts households and threats swirl over supplies of everything from Russian natural gas to manufacturing components.

Growth in Europe’s largest economy will be the weakest among the Group of Seven nations this year, according to fresh forecasts published Tuesday by the International Monetary Fund, which predicts expansion will dip further in 2023.

While distinctly more gloomy than European Commission projections from just two weeks ago, the IMF is more upbeat than economists at Credit Suisse AG and Deutsche Bank AG, who say a recession that will last at least through next spring is starting right around now.

The bleak outlook confirms weeks of warnings out of corporate Germany: Industrial giants including BASF SE and Thyssenkrupp AG are imperiled by reduced Russian energy deliveries, while soaring prices are scaring shoppers away from retailers such as Zalando SE and the chip drought that’s shaken carmakers since 2019 isn’t going away.

“A good decade has ended for Germany -- from here on, we’ll be struggling quite a bit for quite some time,” said Dekabank’s Andreas Scheuerle, who predicts a winter recession.

“Germany is Europe’s problem child in many respects,” he said. “Nowhere else are supply shortages hurting the economy more, the shortage of skilled workers has increased, and then of course there’s our extremely high dependence on Russian gas.”

Data due Friday will show how Germany’s economy fared in the second quarter. Estimates in a Bloomberg survey range from growth of 0.5% to a contraction of the same magnitude -- highlighting uncertainty over the war in Ukraine. The median forecast is for expansion of 0.1%.

Sharp declines in confidence surveys suggest businesses and consumers are retreating fast, with gauges of expectations and new orders pointing to more trouble down the line. Gas prices have more than doubled since the start of June and surged in excess of 10% this week after Russia announced another cut in deliveries due to pipeline maintenance.

One in six industrial firms is cutting production or partially suspending operations, according to the Association of German Chambers of Commerce and Industry. The share among energy-intensive businesses is twice as high as elsewhere.

“Germany’s economic prospects are rapidly deteriorating,” said Veronika Roharova, an economist at Credit Suisse International. “The recent collapse in high-frequency indicators suggests that the economy may already be contracting.”

As Germany’s Federal Network Agency urges companies to reduce gas use to avoid supply cutoffs, Uniper SE became the first major corporate casualty of the crisis. The utility, which has been forced to cover missing Russian supplies at surging spot-market prices, secured a 17 billion-euro ($17.3 billion) rescue package last week to prevent Germany’s energy network from collapsing.

Meanwhile, more than 70% of Germans predict the economic situation will worsen in the next five years, a survey by polling firm Civey for Spiegel magazine showed. Only 11% see a longer-term recovery.

German consumer confidence as measured by research firm GfK will fall in August to the lowest level since data were first collected in 1991. Fears of an impending recession rose among respondents, and income expectations fell to a record on stubbornly high inflation.

Deutsche Bank, Credit Suisse and the IMF predict output will grow 1.2% this year. Opinions diverge over where the country will go next: Economists at the two banks see contractions in 2023 of 1% and 0.7%, while the Washington-based lender has a more optimistic projection for 0.8% growth.

(Updates with economist in 10th paragraph, consumer confidence in penultimate.)

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