The economy shrank by 0.1% quarter-on-quarter in April-June; further shrinking in the third quarter would mean a technical recession. Since growth is not likely to pick up much in the next two to three quarters, the economic outlook for Germany is gloomy, with potentially significant political consequences.
- Germany’s hard-line stance against ambitious euro-area reform is likely to become more entrenched.
- The implications of a German slowdown for the EU-26 will increase the chances of the ECB using unconventional policy to add stimulus.
- A recession is likely to have negative effects on Germany’s defence spending, despite US pressure on Berlin to contribute more towards NATO.