After the UK, Germany faces possible recession as consumer confidence plummets

After the UK, it is now Germany's turn to send chilled winds to the rest of the world fearing a recession.

Only last week that experts had predicted a technical recession for Europe's oldest economy; now the continent's largest economy is in the same boat after business and consumer confidence fell more than economists forecast, heightening concern that Germany may be slipping into a recession.

As a consequence, this lack of confidence in the once-resilient economy sent the euro down to again test levels not seen since February. Earlier in the week, the British economy had reported to have entered a technical recesion. (See: British economy grinds to a standstill; technical recession likely, say experts)

The Munich-based Ifo Institute's closely-followed business sentiment index tumbled much more sharply than expected in August, falling to a three-year low of 94.8 from 97.5 in July. Consensus expectations were for a more modest decline to 97.1. Additionally, according to Nuremberg-based market research company GfK AG, consumer sentiment slumped to the lowest level in five years.

Surprisingly,  in the US, considered to be worse affected by the ongoing financial crisis, consumer confidence in August increased more than forecast. The US Conference Board's confidence index rose to 56.9 from 51.9 in July. Separate reports showed new-home sales increased in July and home prices dropped at a slower pace in the second quarter. However, the American economy is not out of the woods yet.

A weakening labour market, falling home prices and higher inflation may curb consumer spending for the remainder of the year even as gasoline prices have fallen during the last six weeks. The confidence report does little to ease concern that economic expansion will slow after the effects of the federal tax rebates fade.

Coming back to Germany, the roughly 7,000 companies participating in the Ifo poll became gloomier both about their current business situation and their trading outlook. Ifo's gauge of business expectations dropped to 87, the lowest since February 1993, when Germany was experiencing the worst recession of the past two decades. A measure of current conditions eased to 103.2 from 105.7.

Ifo said the climate in manufacturing cooled off further, as companies expect "weaker support from export business." The sub-index hit its lowest level since the summer of 2003. German retailers were also more pessimistic about their trading outlook this month than in July.

Meanwhile, market-research firm GfK's forward-looking consumer-climate indicator dipped to 1.5 for September from a downwardly revised 1.9 in August. The September reading was the lowest since summer 2003, GfK said.

The survey was released after data from the Federal Statistics Office confirmed the German economy shrank in the second quarter, weighed down by cautious consumers and cutbacks in construction. Gross domestic product (GDP) fell 0.5 per cent on the quarter between April and June when adjusted for seasonal and calendar effects, after increasing 1.3 per cent in the first quarter.

"Economic development in the second quarter of 2008 was shaped by declining domestic activity," read a report accompanying the GDP data.

Construction investment fell 3.5 per cent after rising 5.7 per cent in the January to March time period. Private consumption fell 0.7 per cent, compared with a 0.4 per cent drop in the previous quarter. Exports fell by 0.2 per cent after 2.1 per cent growth in the first quarter. Investment in machinery and equipment also fell, by 0.5 per cent, after 1.6 per cent growth in the previous quarter.

German economics minister Michael Glos said the GDP figures show that "the economy in Germany is experiencing a serious, international stress test that is likely to last a while." He called on government efforts to boost the economy with added productivity and price stability. He further noted that a healthier outlook in the government's budget allowed more room for tax cuts.