The Bundesbank blamed Brexit and the trade war between the US and China for a drop in orders for cars and industrial equipment that have helped Germany’s economy previously flourish. The downturn in the second quarter of the year is likely to continue in the third quarter leaving the economy on the brink of a technical recession, two consecutive quarters of negative Gross Domestic Product growth. Exports “were down substantially” as Brexit preparation plans ahead of Britain’s initial March exit date meant companies stocked up their inventories in the first quarter.
GDP has slumped 0.1 percent in the three months to June and Germany’s central bank is expecting a similar drop in the three months to September.
The Bundesbank said: “The overall economic performance could decline slightly once again. Central to this is the ongoing downturn in the industry.
“Future developments will hinge on how long the present economic dichotomy lasts and which direction it takes one it dissolves.
“As things currently stand, it is unclear whether exports and, by extension, the industry will regain its footing before the domestic economy becomes more severely affected.”
Growth forecasts this year by the Bundesbank and the European Commission of 0.5 percent are expected to be slashed to nearer 0.2 percent or 0.3 percent.
Analysts at Deutsche Bank said even downgraded figures could face further downward revisions.
They said: “Given the increasingly fragile state of the global economy, the realisation of one or more risks could easily push the economy into a completely different scenario.”
Deutsche Bank already believes Germany is in a “technical recession” – which is defined as two consecutive quarters of negative growth.
The bank’s chief economist Stefan Schneider said: “We acknowledge these reductions do not proerply heed the accumulation of risks we have been facing over the last few quarters.
“Given the increasingly fragile state of the global economy, the realisation of one or more risks could easily push the economy into a completely different scenario, where growth revisions of a few tenths of a percentage point will not be sufficient.”
The economic slump could plunge Angela Merkel’s fragile coalition government into chaos with the junior coalition partner potentially pulling its support.
The Social Democratic Party is currently awaiting the outcome of its leadership race amid a fall in public support for the party.
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Mr Schneider said: “The fog over the coalition’s future is unlikely to lift before the end of October when the SPD will present the result of the membership ballot on its new leader.
“We think that Merkel’s government will become even more fragile.”
Finance minister Olaf Scholz has hinted that the government is preparing a stimulus package to help the economy through a downturn.
He said on Sunday that the government should be able to deploy a €50 billion stimulus package, as it did after the financial crisis in 2008.
Meanwhile inflation across the Eurozone has continued to fall, according to figures released on Monday.
Eurostat, the European Union’s statistics agency, revised down its figure for eurozone inflation in July.
Its initial forecast of 1.1 percent was revised to one percent – below the previous month’s inflation of 1.3 percent and even lower than the ECB’s target of close to two percent.