Is Germany Headed For Recession?

Is Germany Headed For Recession?

In Germany, where, according to health minister Jens Spahn, “pretty much everyone” will be vaccinated against COVID, recovered from it or “dead” by winter’s end, officials were pondering fresh measures to combat the latest virus wave on Wednesday.

Angela Merkel asked the heads of the country’s 16 federal states to decide on stricter containment protocols, calling the situation “highly dramatic” and “worse than anything we’ve seen.'” Spahn on Tuesday reiterated that the country shouldn’t rule out a national lockdown. Or a vaccine mandate. “Immunity will be reached,” he said. “The question is whether via vaccination or infection [and] we emphatically recommend” the former.

Austria last week announced compulsory vaccinations, raising eyebrows. Political support for the controversial step seems to be growing in Germany. “Hopes of a swift exit from the pandemic have vanished,” the heads of Bavaria and Baden-Wuerttemberg wrote, in a jointly-published article this week. “A general vaccination requirement would be the best and fastest way to get us out of this,” they added.

The unvaccinated already face curbs on many activities. Italy is considering stricter rules for those who haven’t had a shot as well.

Given the rapidly deteriorating situation and the distinct possibility that a new lockdown or a mandate could have a polarizing effect on the polity just as Olaf Scholz (who sealed a coalition deal Wednesday) steps into the Chancellorship, you’d be forgiven for harboring reservations about the near-term outlook.

“Not only has Austria been a very good leading indicator for what will happen in Germany in terms of infections and government measures, this morning’s news that the SPD, Greens and FDP have come to a coalition agreement could also bring change,” ING’s Carsten Brzeski wrote Wednesday, adding that “Germany’s reaction to the fourth wave has suffered from a power vacuum, with the caretaker government not wanting to decide on stricter measures and the incoming government not ready yet.”

German business confidence dropped a fifth consecutive month in November, data out Wednesday showed. The Ifo gauge printed 96.5, slightly below estimates and the lowest since April (figure below).

“Sentiment in the German economy has taken a downward turn,” the survey said, noting that businesses were “less satisfied with their current business situation, and expectations became more pessimistic [as] supply bottlenecks and the fourth wave of the coronavirus are challenging German companies.”

The downbeat read on sentiment came a day after flash PMIs suggested the economy is accelerating only “slightly” even as the headline gauges ticked higher from October.

“The latest uplift in new work was the slowest for nine months as gains to demand were hindered by supply bottlenecks, input shortages and an associated decline in demand from the automotive sector,” IHS Markit said, adding that “November’s flash data pointed to a stalling of new business at German service providers, with the respective index only just above the neutral level as panelists noted that uncertainty surrounding the pandemic and supply delays had dampened client demand.”

Price pressures didn’t abate. Both input costs and output charges rose at an “unprecedented” rate on “supply delays, material shortages, rising energy bills and greater wage costs.”

Recall that German inflation is running the hottest in decades (figure below).

Earlier this week, the Bundesbank cautioned that inflation could be close to 6% in November, and may remain elevated for longer than previously expected. “In addition, new pandemic restrictions risk weighing on demand for services, which has been an important driver of the recovery amid the manufacturing headaches,” Bloomberg remarked, in a short Wednesday article. That’s a recipe for stagflation.

Taken together, all of the above means the new government faces significant hurdles, to put it nicely.

In addition to managing the economy and the virus, the new coalition will also need to confront a burgeoning energy crisis and an emboldened Vladimir Putin.

“For the entire economy, the combination of supply chain frictions, higher energy prices and higher inflation in general already argued in favor of a significant slowdown of economic activity in the final quarter of the year,” ING’s Brzeski went on to say. “The fourth wave of the pandemic could now actually push the economy to the brink of stagnation, or even technical recession.”

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