Fear of economic recession in the second quarter

The German government says it expects the Iran war to lead to a deep recession in the economy in the second quarter.

The forecast comes less than a month after the government cut its economic growth forecast for the full year by half to 0.5%.

“Rising prices, supply chain issues and uncertainty are weighing on sentiment among businesses and households,” the Ministry of Economic Affairs said in its monthly report.

It says further economic growth will depend on how long the conflict in the Middle East lasts and how long trade routes and production capacities remain affected.

“But even as conditions ease, the impact on energy and raw material prices and supply chains is likely to remain noticeable over the long term.”

Europe’s largest economy had a stronger-than-expected start to the year, with gross domestic product expanding 0.3% in the first quarter compared with the previous quarter.

Rising prices are also taking a toll on industries.

According to the Federal Statistics Office, high energy costs have caused Germany’s energy-intensive industries to reduce production and cut thousands of jobs.

Output in the chemical, paper, glass and metal manufacturing sectors declined by 15.2% from February 2022. The number of workers declined by 53,300 or 6.3%.

The statistics office said the decline in output was most pronounced among manufacturers of concrete, cement and sand-lime brick products.

An exception was petroleum processing: it increased its production by 24.6% and created 1,000 new jobs.

Decline in sentiment in residential construction sector

Meanwhile, sentiment in Germany’s housing construction sector fell to the lowest level in four years in April.

The Munich-based Ifo Institute’s business climate index for the region fell from minus 19.3 points in March to minus 28.4 points last month.

“Geopolitical uncertainty is now also impacting residential construction in Germany,” said Ifo’s Klaus Wohlrabe. “With fragile supply chains and rising financing costs, multiple risks are impacting the construction sector at once.”