Germany likely to head into recession, central bank warns

Germany’s economy is heading into recession after the country’s central bank warned that a slump in exports during the summer was likely to continue into the autumn.

The Bundesbank said a downturn in orders for cars and industrial equipment in the second quarter of the year was likely to continue in the third quarter, leaving the economy on the brink of a technical recession, defined as two consecutive quarters of negative GDP growth.

The bank, blaming a drop in exports, said Brexit and the trade war between the US and China were among the factors responsible for a 0.1% drop in GDP in the three months to June and would likely create a similar drop in the three months to September.

It said: “The overall economic performance could decline slightly once again. Central to this is the ongoing downturn in industry.”

Forecasts of growth this year of 0.5% by the Bundesbank and the European commission are likely to be downgraded to nearer 0.2% or 0.3%, though analysts at Deutsche Bank said even these figures were vulnerable to downward revisions.

“Given the increasingly fragile state of the global economy, the realisation of one or more risks could easily push the economy into a completely different scenario,” the bank’s analysts said.

Related: Warning signs for global economy: the countries spooking investors

The dip in economic performance, even if it proves to be short-lived, comes at a bad time for Angela Merkel’s coalition.

The junior coalition partner, the Social Democratic party (SPD), is awaiting the outcome of a leadership election that many observers believe will result in the left of centre party, which has slumped in the polls, pulling its support.

Stefan Schneider, Deutsche Bank’s chief economist, said the coalition was also heading for heavy losses in the important state elections in Saxony and Brandenburg, where the Green party and the rightwing Alternative for Germany are expected to make gains.

He said: “The fog over the [coalition’s] future is unlikely to lift before the end of October when the SPD will present the result of the membership ballot on its new leader(s). We think that Merkel’s government will become even more fragile.”

Germany has the fiscal strength to counter any future economic crisis “with full force”, said the finance minister, Olaf Scholz, suggesting Berlin could provide up to €50bn (£45.7bn) of extra spending.

His comments came after a report last week said Germany was prepared to ditch its balanced budget rule and take on new debt to counter a possible recession.

Confirmation that the country would use the threat of a recession to boost government spending helped calm markets rocked last week by concerns of a global slowdown led by the US, China and Germany.

Eurozone sovereign bond yields, which reflect the borrowing rate paid by governments in the 19-member currency bloc, lifted from record low levels. Germany’s 10-year bond yield was steady at -0.69%, above record lows hit last week at about -0.73%. German 30-year bond yields were also off record lows, trading at -0.22%.

World stock markets were also cheered by a decision from China’s central bank to alter the way it sets a key interest rate benchmark, a move seen by analysts as reducing borrowing costs for companies.

Peter Chatwell, the head of rates strategy at the Japanese bank Mizuho, said Berlin needed the threat of a recession before it could unleash government spending.

He said: “The point which is being missed is that the German fiscal stimulus is conditional on a recession, and existing law already allows for this.

“The European Central Bank [ECB] would probably restart QE [quantitative easing] before the German fiscal taps were at risk of being nudged open.”

Inflation in the eurozone has more than halved in the last year from 2.2% to 1%, leaving the ECB little option but to cut the cost of borrowing from its already low levels.

Mario Draghi, the ECB’s outgoing president, said last month that the outlook for eurozone growth was worsening and inflation remained well below the bank’s 2% target. He said Europe’s central bank would use every weapon at its disposal to mitigate deflationary pressures.