September 24, 2019 / 8:32 AM / a month ago

German downturn 'taking a breather' but recession still looms: Ifo

BERLIN (Reuters) - German business morale rose in September for the first time in six months but Europe’s largest economy is still likely slipping into recession as the U.S.-China trade conflict and Brexit bite, the Ifo economic institute said on Tuesday.

Ifo’s business climate index rose to 94.6 from 94.3 in August, snapping a run of five consecutive falls. September’s reading compared with a consensus forecast for 94.4.

“The downturn is taking a breather,” Ifo President Clemens Fuest said in a statement. But he added: “In manufacturing, the business climate has only one direction: downward.”

Germany’s export-reliant economy is suffering from slower global growth and business uncertainty caused by U.S. President Donald Trump’s ‘America First’ trade policies and Britain’s planned, but delayed, exit from the European Union.

Ifo’s current conditions index rose to 98.5 from 97.4 in August but its expectations index fell to 90.8 from 91.3.

Ifo economist Klaus Wohlrabe said the German economy is likely to shrink again in the third quarter.

That would put it in recession - usually defined as a period of at least two consecutive quarters of contraction - after it shrank by 0.1% in the second quarter.

“This is not the start of a change of trend,” Wohlrabe said of Tuesday’s firmer overall sentiment reading. “The slowdown is only taking a break,” he told Reuters, adding that no signs of improvement were to be seen for German industry.

Economy Minister Peter Altmaier, speaking immediately after the release of the Ifo data, said Germany’s growth dynamics have deteriorated but insisted: “We are not in a recession.”

Much of the German economy’s fortunes are tied up in factors beyond its control: mainly weaker global growth, developments in the U.S.-China trade conflict and the question of whether Britain can achieve an orderly exit from the European Union.

U.S. Treasury Secretary Steven Mnuchin said on Monday that he and U.S. Trade Representative Robert Lighthizer would meet with Chinese Vice Premier Liu He for trade talks in two weeks.

On Brexit, EU negotiator Michel Barnier struck a downbeat note on Tuesday, saying there was no reason to be optimistic that Britain and the bloc will find a solution to the thorny question of the Irish “backstop”.

RECESSION RISK RISING

ING economist Carsten Brzeski said the likelihood of a third quarter contraction in Germany was rising “almost by the day”.

On Monday, a purchasing managers’ survey showed that German private sector activity shrank for the first time in 6-1/2 years in September as a manufacturing recession deepened unexpectedly and growth in the service sector lost momentum.

Highlighting the weakness in the manufacturing sector, engineering lobby group VDMA also said on Monday production in Germany’s engineering sector will decline by 2% both this year and in 2020. It cited trade conflicts and uncertainties linked to Britain’s planned exit from the EU.

“While a ‘light’ technical recession is not the end of the world for an economy which has been growing for more than 10 years and has an unemployment rate at all-time lows, it is the lack of any signals of an imminent rebound which is more concerning,” Brzeski said.

FILE PHOTO: The financial district is photographed on early evening in Frankfurt, Germany, January 29, 2019. REUTERS/Kai Pfaffenbach/File Photo

“Calls for government action will continue,” he added.

Finance Minister Olaf Scholz said earlier this month Germany is ready to pump “many, many billions of euros” into its economy to counter any significant slowdown in growth.

But on Friday, the government said a new package of measures to protect the climate would be budget-neutral and that it was sticking to its ‘black zero’ balanced-budget policy, dashing economists’ hopes for a fiscal splurge.

Writing by Paul Carrel; Editing by Thomas Seythal and Darren Schuettler

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