Ifo institute cuts German 2019 GDP forecast, sees recession in Q3

The Ifo Institute for Economic Research has cut its 2019 growth forecast for Germany and said a recession would hit Europe‘s largest economy in the third quarter, the latest gloomy forecast that raises pressure on the European Central Bank to loosen policy.

On Thursday, the Ifo cut its growth forecast for this year to 0.5 percent from 0.6 percent. It also said the German economy would probably shrink by 0.1 percent in the third quarter, which would amount to a recession after a similar contraction in the April-June period. 

“The outlooks is weighed down by high uncertainties,” said Ifo’s Timo Wollmershaeuser, pointing to possible risks to the economy from a no-deal Brexit and an escalation of United States President Donald Trump’s trade wars.

The German economy has weakened as its export-dependent manufacturing sector languishes in recession due to trade conflicts and uncertainty linked to the United Kingdom‘s planned departure from the European Union.

Ifo said the manufacturing sector’s weakness is gradually spreading to other parts of the economy, including logistics and the services sector. This was leaving a mark on the labour market, it said.

The institute expects a slight recovery in the fourth quarter. It said its forecasts were based on the assumption that there will neither be a no-deal Brexit nor an escalation in Trump‘s trade conflicts, which suggests even weaker growth in Germany should either of those eventualities materialise.

For 2020, Ifo cut its growth forecast to 1.2 percent from 1.7 percent.

Germany’s Macroeconomic Policy Institute (IMK) earlier on Thursday said there was an almost 60 percent chance that the German economy could fall into recession, while the Kiel Institute for the World Economy (IfW) on Wednesday slashed its growth forecasts due to trade disputes and Brexit uncertainty. 

Also on Thursday, in advance of a decision by the European Central Bank on stimulus measures, German Finance Minister Olaf Scholz sought to calm savers worried that the ever-lengthening period of low interest rates in the euro zone could see them paying negative interest on their deposits.

Scholz told the Passauer Neue Presse newspaper that savers need not reckon with negative interest rates “across the board”.

“Most contracts that customers have with their banks do not currently allow such penalty rates, so the problem is not acute,” Scholz said. “Banks’ boards are wise enough to grasp what they would trigger with such penalty rates.

“I don’t think private customers in Germany need to reckon with negative interest rates across the board. We are monitoring the situation and are considering our options to act,” he added.