Chart of the Week: New Year brings a renewed downturn in Germany

The recently released IFO survey indicates that Europe’s largest economy, Germany, has continued to weaken after entering a technical recession in the second half of 2023. The headline measure sank in February, with businesses reporting worsening in both current conditions and expectations in relation to future sales. At face value, this implies that the economy has continued to contract throughout the first quarter, albeit at a slower rate than was seen in the second half of 2023. Some of the headwinds the German economy faced last year have abated. Headline inflation dropped from 8.7% in January 2023 to 2.9% in January 2024, helping to support real incomes. Meanwhile, European natural gas prices are below pre-Ukraine war levels. The European Central Bank has paused its rate hiking cycle, with its next move being a possible cut. However, a sustained disinflationary period is not guaranteed, with wage growth rates still looking too high for price increases to be consistent with the target. Investors have moved in that direction in recent weeks and, according to market pricing, any rate cutting cycle will possibly come later and be shallower than was anticipated just a few weeks ago. Judging the potential turning points in economic activity is notoriously difficult, making any assessment all the more urgent. We will provide updates for the German and global economies in our forthcoming Global Outlook Spring 2024.

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The views expressed in this article are the views of the author, not necessarily those of LSEG.

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