The risk of stagnation or even recession at the end of the year has increased significantly

At this stage, and with the escalation of the fourth wave of the pandemic, all of the traditional leading indicators have in fact become retrospective indicators. They paint a picture of the economic outlook against the backdrop of supply chain frictions, not the pandemic. As such, it will be necessary to wait for the batch of confidence indicators of December before having a better vision of the economic impact of the fourth wave of the pandemic.

In recent days, Germany has already introduced stricter restrictions but is still a long way from the Austrian situation. That could change soon. Not only has Austria been a very good leading indicator of what will happen in Germany in terms of infections and government measures, but this morning’s news that the SPD, Greens and FDP have come to an agreement coalition could also bring about changes. Germany’s reaction to the Fourth Wave suffered from a power vacuum, with the custodial government unwilling to decide on tougher measures and the new government not yet ready, and possibly unwilling to start a new era with stricter restrictions. The expected press conference from the leaders of the likely new government this afternoon could shed light on the upcoming restrictions and potential measures.

Returning to the economic outlook, the German economy was already suffering from persistent supply chain friction, higher inflation in general and rising energy and commodity prices in particular. Industrial production contracted in both the second and third quarters, despite well-filled order books and low stocks. The only advantage for the industry is that it only needs certain inputs to succeed in creating at least a short-term activity rebound. More structurally, however, it will be the spring of next year that supply chain frictions begin to ease and thus benefit German industrial production. For the economy as a whole, the combination of supply chain frictions, rising energy prices and rising inflation in general already argued for a significant slowdown in the economy. economic activity in the last quarter of the year. The fourth wave of the pandemic could now push the economy to the brink of stagnation, or even technical recession. Admittedly, the adaptability of the economy to lockdowns, supported by government and central bank measures, has clearly strengthened since March 2020.

Today’s Ifo Index shows that the mood of German companies continued to deteriorate ahead of the escalation of the fourth wave of the pandemic. This does not bode well for the months to come. The risk of stagnation or even recession in the German economy at the end of the year has increased markedly.