Germany heading for recession despite new relief plan – economists

Germany, Europe’s largest economy, is still on course for a recession even with a new government plan to spend 65 billion euros ($64.49 billion) on shielding energy customers and businesses from soaring inflation, economists say.

The latest package brings to 95 billion euros the amount allocated to inflation-busting since the Ukraine war began in February. By contrast, the government spent 300 billion euros on propping up the economy over the two years of the pandemic.

“The third relief package does little to change the fact that Germany is likely to slide into recession in the autumn,” said Commerzbank chief economist Joerg Kraemer.

ING chief economist Carsten Brzeski agreed: “The package will probably fall short in preventing the broader economy from falling into recession.”

Economists widely define a recession as two or more consecutive quarters of negative growth, or contraction.

The German economy grew by the narrowest of margins in the second quarter, and the war in Ukraine, soaring energy prices, the pandemic and supply disruptions are now pushing it towards a downturn, which it may already be in.

A survey published on Monday showed Germany’s services sector contracted for a second month running in August as domestic demand came under pressure from soaring inflation and faltering confidence.

Russia’s decision to stop pumping gas via the Nord Stream 1 pipeline adds to Germany’s woes, though Germany’s gas stores reached 85% of capacity on Saturday and Chancellor Olaf Scholz has vowed the country “will come through this”.

“The relief package cannot change the fact that Germany has become poorer as a net importer of energy,” Kraemer said. “Companies have to cut back on the use of energy, which has become expensive, and cut their production accordingly.”

The trade union-affiliated Macroeconomic Policy Institute (IMK) sees the latest government support measures preventing a drastic decline in consumer demand in the coming months.

The measures could “at least significantly mitigate or possibly even prevent a recession that is now looming”, IMK director Sebastian Dullien.

($1 = 1.0080 euros)