After yesterday’s release of German GDP data for the third quarter, it is now offical: Germany is in recession. After a contraction of (revised) 0.4 percent in the second quarter, the summer quarter saw another contraction of 0.5 percent in quarter-on-quarter terms.
Given this outcome, the official forecasts for the German economy for 2009 now look grossly over-optimistic. Only on Wednesday, the council of “Economic Wise Men”, the Sachverständigenrat, published its annual forecast and predicted a stagnation of GDP for 2009. The government still officially predicts a meagre 0.2 GDP growth for 2009. IMF, EU Commission and OECD also predict stagnation for the German economy.
However, given the past profile of GDP growth in 2008 and taking into account the large negative statistical overhang that has now accumulated for 2009, in order to get to a flat reading for the whole year of 2009, we would need to see an extremely quick and strong recovery from the current recession. For example, a scenario with a further last contraction of 0.3 percent in the last quarter of this year, a stagnation in the first quarter of 2009 and return to growth afterwards with rates of growth reaching 0.5 percent at the end of 2009 would yield just such an outcome.
In face of the latest readings on business confidence and order intakes, such a scenario looks highly unlikely at the moment. Even if Q4 of this years ends up slightly less dismal than Q3 (which is possible given that the reading in Q3 seems to be distorted by strong imports), there is no indication yet that the recession might be over at the beginning of 2009. Instead, there is no single indicator (except the ZEW survey which measures mostly the mood among financial market participants) which even indicates that we have reached the bottom of the downturn yet.
Odds are rather that the downturn has just began. Only now, firms have started to lay off workers. Only in the coming months, the second-round effects of the bad export orders on investment and employment decisions will be felt. According to the business surveys, German companies have been surprised by the extent of the downturn. Thus, reactions cannot yet be in the data.
Thus, it is likely that the economy will contract further at least at the beginning of 2009, with a recovery at best only in the second half of next year. If this is true, overall GDP for 2009 is set rather to contract by 1.0 percent than to stagnate.
This post has been co-posted at Eurozone Watch.