San Francisco Frontiers - Industrial slump leaves Germany on brink of recession

Federal statistics agency Destatis will unveil its quarterly GDP estimate at 10am (0900 GMT).

The economy ministry has said it expects "a renewed slight decline" after gross domestic product already shrank by 0.1 percent in the second quarter.

A technical recession is defined as two consecutive quarters of contraction.

"The German economy is unlikely to have emerged from its weak phase in the third quarter," the ministry said in its autumn forecasts this month.

Analysts surveyed by FactSet were narrowly more upbeat, predicting a quarter-on-quarter stagnation.

Other major European economies were also set to publish third-quarter GDP data Wednesday. The figure for the eurozone as a whole will likely be weighed down by Germany's performance.

Traditionally a European growth engine, Germany has been hit hard by elevated energy costs in the wake of Russia's war in Ukraine, sluggish domestic consumption following a period of high inflation and cooling export demand.

The headwinds have taken their toll on the country's crucial industrial sector, which accounts for around 20 percent of German GDP.

"The manufacturing sector is running out of orders," the BDI federation of German industries said in its latest report.

The BDI now sees factory output falling by three percent year-on-year in 2024, noting that this would be "the third consecutive drop".

The downturn has been particularly visible in Germany's flagship auto sector.

Volkswagen is considering closing at least three German plants and axing tens of thousands of jobs, labour leaders told employees this week, as Europe's biggest car manufacturer confronts stiff Chinese competition especially in electric vehicles.

Volkswagen, BMW and Mercedes-Benz all lowered their annual outlook in September, citing falling Chinese demand.

- Government under pressure -

Long-standing structural challenges are adding to Germany's woes, including complex bureaucracy, under-investment in infrastructure, an ageing workforce and a costly green energy transition.

Pressure is mounting on Chancellor Olaf Scholz's government to take action, but the fragile three-party coalition is at odds over how best to turn the economic tide.

Economy Minister Robert Habeck, from the Greens party, last week proposed a multi-billion-euro investment bonanza to help German business.

But the idea was quickly shot down by hawkish Finance Minister Christian Lindner.

Lindner, from the liberal FDP, is a staunch defender of Germany's constitutionally enshrined debt limits and has resisted calls from other coalition members to loosen the rules.

The International Monetary Fund has waded in on the debate, with its European head Alfred Kammer on Tuesday saying Germany needed structural reforms as well as public infrastructure investments.

To achieve this, he told the Sueddeutsche newspaper, "the debt brake can be relaxed".

Germany was the only major advanced economy to shrink in 2023 and the government expects another mild contraction in 2024.

But it sees a recovery starting in 2025, when easing inflation and higher wages are expected to boost consumption.

German inflation slowed to 1.6 percent in September, the lowest level since 2021. October's inflation figure is due later on Wednesday.

M.Gonzalez--SFF