The prospects for the German economy in August deteriorated somewhat. After a sharp drop in previous months, the “balance” has shifted between the bullish economic analysts and the pessimists polled by the prestigious ZEW in August. Their expectations for the next six months fell to -55.3 points in August from -53.8 points in July, hitting their lowest level since the 2008 financial crisis.

The drop was in line with our forecast of -55.0 points, but fell short of Reuters analysts’ expectations that there was no change. The index remains at some distance from levels seen during previous crises, such as the coronavirus pandemic, the global financial crisis, or the severe economic downturn in Germany in the early 2000s, when it fell below -90 points.

Although the German economy is likely to deteriorate further and remain in recession during the first half of 2023, this recession will not be as deep as in previous historical stages. A key driver of the downturn is the decline in gas sales from Russia, which has led to excessively high wholesale gas prices, putting pressure on both the industry and consumers. A number of other factors are also hurting, such as the low water level in the Rhine and the ongoing, albeit gradually decreasing, supply shortages caused by the pandemic. These factors are affecting the economy at a time when it was poised for a strong cyclical recovery, with strong and resilient household balance sheets, a buoyant labor market and consumers willing to spend once coronavirus-related restrictions are lifted.

And inflation in Germany will rise before there are signs of improvement. Most analysts still expect inflation to be below today’s high for six months. But inflation could pick up even more in the coming months. After all, temporary government interventions will end in September, including tax cuts on fuel and special discounts on public transport tickets. In addition, further increases in natural gas prices will enable importers to pass higher costs on to consumers more quickly.

* Economist at investment bank Berenberg Bank