FRANKFURT AM MAIN (AFP) – The German economy could enter a recession in the third quarter, the Bundesbank warned yesterday, as the debate on government measures to support the economy swelled in Berlin.
“The economy could contract again slightly” this summer, Germany’s central bank said in its monthly report, following a 0.1-per cent decline in gross domestic product (GDP) in the second quarter.
“According to data currently available, industrial production is expected to shrink markedly in the current quarter as well.”
Having seen a decline in trade against the backdrop of the United States (US)-China trade war, two of its main customers, Europe’s biggest economy will enter what it technically defines as a recession should GDP shrink further.
Alarmist signals are reviving the political debate between those who support the German government’s dogma of balanced budgets and those seeking more flexibility in order to revive the economy.
Germany can afford it on paper after five consecutive years of budget surpluses and interest rates for long-term loans that are extremely attractive to the federal government.
As US-China tensions intensify, economists have urged Berlin to fork out cash to avoid a recession, but Chancellor Angela Merkel’s government has previously said things were not yet bad enough to warrant loosening the purse strings.
On Sunday, German Finance Minister Olaf Scholz hinted at a potential intervention, stating that Germany could “fully face up to” a new economic crisis.
In particular, several Social Democrats, junior partners in Merkel’s coalition government, want Germany to draw on its reserves to finance a plan to combat global warming or infrastructure works.
Flexibility instruments could enable Berlin to draw on its large budget surplus of 1.7 per cent of its GDP as early as September.