Germany will not avoid a recession, says Nomura By Investing.com

Investing.com — Germany is headed for a recession, and even recent policy measures by the European Central Bank (ECB) may not be enough to avert it.

Analysts at Nomura have downgraded their outlook for Germany’s economy, projecting a three-quarter recession that will lead to a 0.4 percent drop in total output.

The forecast stems from a convergence of deep-rooted structural problems and unfavorable global conditions, which together set the stage for an economic contraction that Germany will likely struggle to avoid.

At the heart of Germany’s economic challenges are long-standing structural concerns that have worsened in the face of current economic headwinds.

Germany’s reliance on its manufacturing sector, along with its exposure to global trade cycles, has made the economy particularly vulnerable to external shocks.

This dependence is most evident in its trade relations with China, which have seen significant fluctuations as global demand weakens.

The global slowdown, particularly in manufacturing and industrial output, has hit Germany harder than most of its eurozone counterparts, leaving it more susceptible to recession.

Energy prices have also played a key role in Germany’s current economic struggles. The aftershocks of the sharp rise in energy prices – fueled primarily by geopolitical tensions and disruptions in global supply chains – are still being felt in the German economy.

“The way we think about Germany is that structural concerns abound – from the country’s greater exposure to China and the global manufacturing cycle, the energy price ‘sticker shock’ that continues to reverberate through the economy and weak demographic trends (population decline, growth population). dependency ratio) – have lowered the bar for any given cyclical downturn to lead to recession,” Nomura analysts said.

With fewer working-age people supporting a growing number of retirees, the economy faces structural constraints on long-term growth.

These demographic problems, combined with Germany’s reliance on manufacturing, significantly lowered the threshold for any economic downturn to lead to an outright recession.

The Sentix survey, a key gauge of investor sentiment, shows a continued deterioration in Germany’s economic outlook, with both current conditions and future expectations falling well below pre-pandemic levels.

Germany has become a notable weak spot in the eurozone, with its outlook deteriorating at a faster pace than the wider region.

Official data on industrial production paints an equally bleak picture. Over the past eighteen months, Germany’s industrial output has fallen sharply and, unlike other eurozone economies, there has been no clear sign of a turnaround.

Nomura also suggests that the ECB’s recent actions, while important, will likely come too late to save Germany’s economy. The ECB recently cut its deposit rate by 25 basis points to 3.50% and raised its core inflation forecast for next year.

However, it also revised down its GDP growth forecasts, highlighting the growing tension between managing inflation and supporting economic growth.

While the ECB’s easing of monetary policy is a necessary step, Nomura analysts say the timing of these measures will not change Germany’s short-term trajectory.

The country’s deeper structural problems – particularly its exposure to external trade shocks and demographic challenges – are unlikely to be resolved through monetary policy alone.

Germany’s economic problems have wider implications for the eurozone. As the bloc’s largest economy, a prolonged recession in Germany could dampen overall eurozone growth, prompting a more cautious approach from policymakers in other member states.

Nomura has already revised its forecasts for euro zone GDP down, citing structural challenges in Germany as a key risk to the regional recovery.