News

In the spring, the German economy was just on the verge of recession. Since then, according to various business climate surveys, it has made… a step forward. A contraction of activity seems unavoidable. Its duration and extent will depend on the developments of the energy crisis. Germany is exposed to the risk of a gas shortage, the intensity of which depends mainly on two factors, one geopolitical (the magnitude of Russian gas shutoff), the other technical (the diversification via other gas suppliers and other source of energy). In the longer term, Germany's growth model is being called into question.

Recession, no longer a question of if, but when and how far

As soon as the war in Ukraine began, the business climate in Europe, and especially in Germany¹, began to weaken. At the time, it was difficult to say whether this was just a one-off reaction to a shock of uncertainty - perhaps an overreaction that could be quickly reversed - or the start of a downturn in the economic cycle. Five months later, the scenario of a downturn is now well established.

Unlike the 2020 recession, activity was not brought to a sudden halt by the war in Ukraine, except in the automotive sector which was deprived of essential components. At the same time, the service sectors have benefited from the lifting of health restrictions, more or less compensating for the deterioration in other sectors (chart lhs). The catch-up in services is now behind us. Up to now, the Bundesbank's weekly activity indicator describes an economy that is roughly stagnant, but not yet experiencing a sharp correction. However, the outlook for activity has been revised down to a degree comparable to the shock of the pandemic, judging by the IFO survey (chart rhs). No sector has been spared. The PMI survey sends a similar signal: in July, the composite output index fell into the “recession zone”, to its lowest level (excluding the pandemic) since the end of 2012.

The direct cause of the fall in business confidence is the ongoing energy crisis, which Vladimir Putin seems to be modulating to suit his interests². From the point of view of the Russian authorities, a total cut-off of gas deliveries is not necessarily desirable because it would reduce export revenues and lose leverage in the tussle with the EU. To inflict maximum pain on Europe, reduced and disrupted deliveries are a more effective way of creating uncertainty and stirring up divisions between countries. This can be seen in the rather lukewarm initial reaction to the Commission's proposal to uniformly reduce gas demand by 15% in the EU. With some Schadenfreude, several countries felt that they did not have to make such an effort to address a problem that primarily affects Germany. This is a short-sighted position, but one that is attributable to the memory of the sovereign debt crises of the past decade. At that time, it was Germany that imposed fiscal austerity measures on southern Europe. A political agreement was eventually reached on this plan. It would be mistaken to think that the rest of the EU will not be affected if the German economy continues to weaken.

(...)

Disclaimer:
Disclaimers for Distribution by ODDO BHF SCA to Non-United States Investors:
This publication is produced by ODDO BHF Corporates & Markets, a division of ODDO BHF SCA (“ODDO”), which is licensed by the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and regulated by the Autorité des Marchés Financiers (“AMF”).
This document, when distributed outside of the U.S., is intended exclusively for non-U.S. customers of ODDO and cannot be divulged to a third-party without prior written consent of ODDO. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document has been developed by our economists. It does not constitute a financial analysis and has not been developed in accordance with legal requirements designed to promote the independence of investment research. Accordingly, there are no prohibitions on personal dealing ahead of its dissemination. “Chinese walls” (information barriers) have been implemented to avert the unauthorized dissemination of confidential information and to prevent and manage situations of conflict of interest.
At the time of publication of this document, ODDO and/or one of its subsidiaries may have a conflict of interest with the issuer(s) mentioned. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. Past performances offer no guarantee as to future performances. All opinions expressed in the present document reflect the current context which is subject to change without notice. The statements, assumptions and forecasts contained in this document reflect the judgment of its author(s), unless otherwise specified, and do not reflect the judgment of any other person or of ODDO. This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this document is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice.
This document is for institutional investors only. It may not contain information necessary for others to make investment decisions. Consult your financial adviser or an investment professional if you are not an institutional investor.

Disclaimers for Distribution by ODDO BHF New York Corporation to United States Investors:
Please refer to the most recent research reports on the subject companies for complete information and relevant disclosures.
This document is produced by ODDO BHF Corporates & Markets, a division of ODDO BHF SCA ( “ODDO”). It is distributed to U.S. investors exclusively by ODDO BHF New York Corporation (“ONY”), MEMBER: FINRA/SIPC, and is intended exclusively for U.S. institutional customers of ONY and cannot be divulged to a third-party without prior written consent of ONY. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document is being furnished to you for informational purposes only and should not be relied upon as sufficient to form a basis for any investment decision.
At the time of publication of this document, ODDO, and/or one of its subsidiaries may have investment banking and other business relationships with any of the companies in this report. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. However, ODDO has no obligation to update or amend any information contained in this publication. Past performance offers no guarantee as to future performance. All opinions expressed in the present document reflect the current context which is subject to change without notice. This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of particular clients. Clients should consider whether any advice or recommendation in this document is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice.
This document is not a research report as defined in FINRA Rule 2241(a)(11) because the material in it is limited to one or more of the exclusions of the definition of research report in Rule 2241(a)(11)(A). This document is for institutional investors only. Consult your financial adviser or an investment professional if you are not sure you are an institutional investor.
Disclosures Required by United States Laws and Regulations:
Rule 15a-6 Disclosure: Under Rule 15a-6(a), any transactions conducted by ODDO, and/or one of its subsidiaries with U.S. persons in the securities described in this document must be effected through ONY.
Contact Information of firm distributing investment recommendations to U.S. investors: ODDO BHF New York Corporation, MEMBER: FINRA/SIPC, is a wholly owned subsidiary of ODDO BHF SCA; Philippe Bouclainville, President ([email protected]) 150 East 52nd Street New York, NY 10022 212-481-4002.

Statement of conflict of interests of all companies mentioned in this document may be consulted on Oddo & Cie’s research site.