Germany appears to be entering a recession. After a significant decline in recent months, the index of business sentiment weakened further in August, although not as much as many feared.

However, the overall index of the prestigious Ifo Institute slightly worsened to 88.5 points from 88.6 points in July.

This value is not as bad as both Reuters and we in Berenberg predicted (namely, 86.8 points and 86.5 points respectively). In addition, the overall Ifo index is clearly below its long-term average of 96.9 points. And the expectations index of 80.3 points in August after 80.4 points in July and 97.2 points of the long-term average looks especially discouraging. Previously, it hit lows only in December 2008 due to the international financial crisis (79.2 points) and in April 2020 due to the coronavirus pandemic (71.9 points).

The above is consistent with our forecast that Germany will enter a recession in the third quarter, which will deepen in the next two quarters. However, the current situation indicator remains at a very good level: 97.5 points this month compared to 97.7 points in July and slightly above the average of 96.7 points.

While the post-pandemic recovery could support the German economy during the summer months of July and August, that impact will fade as consumers and businesses face further increases in fuel and electricity prices – and that will come as the more expensive wholesale prices of natural gas are passed on.

However, the index of business sentiment in the manufacturing industry remains at the low levels of August -6.9 points, ie. has not changed since July. And the services climate index improved to 1.3 points in August from a 1-point drop in July from 11 points in June.

Statistics Germany estimates that GDP is revised upwards in the second quarter to 0.1% from 0% in the previous quarter and remained unchanged at 0.8% in the first quarter. In fact, with these numbers, the country’s economy is returning to pre-pandemic levels in the last quarter of 2019. Finally, private and public spending was also the main driver, increasing by 0.8% and 2.3% qoq, respectively.

The business sentiment index continued to decline in August.

* Economist at the investment bank Berenberg Bank.