Europe’s biggest economy shrank in the third quarter, spelling trouble for the region

Output in Germany fell slightly in the third quarter, official data showed Monday, increasing the risk of a recession in Europe’s biggest economy.

Gross domestic product dropped 0.1% in the July-to-September period compared with the previous quarter, when it grew 0.1%, according to Germany’s Federal Statistical Office (Destatis).

A fall in consumer spending drove the decline. On the other hand, investment by companies into machinery and equipment made a positive contribution to GDP, Destatis said.

The data bodes ill for the entire area that uses the euro because Germany is the largest of its 20 economies.

“Germany’s economy is once again teetering on the brink of a technical recession,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics. A technical recession is defined as two consecutive quarters of declining output.

The German economy has been flirting with recession for almost a year. GDP shrank in the final three months of 2022 before stagnating in the first quarter of this year, according to revised data from Destatis. (An initial estimate by the statistics office had shown two consecutive quarters of declining output.)

Economists say the picture is unlikely to improve soon, as the country’s vast manufacturing sector grapples with weak Chinese demand, high energy costs and painful interest rate hikes. Companies in the sector are shedding jobs at the fastest rate in three years, as new orders decline and confidence remains “deeply negative,” according to survey data for October published last week.

“Germany’s economy is now firmly stuck in the mud,” Vistesen said, noting that it was doubtful the economy would recover in the fourth quarter. “Risks are tilted to the downside for the start of 2024,” he added.

There was better news on inflation. Consumer prices rose 3% on average in October compared with a year ago, according to an initial estimate published by Destatis Monday. This marked a sharp slowdown from a rate of 4.3% in September.

A drop in energy prices over the past year — from very high levels last fall — dampened this month’s inflation reading, Destatis said.

While Germany’s economy may be particularly hard-hit, business activity in the rest of the euro area has also been lackluster and economists think a period of stagnation, or even a mild recession, is looming in the region.

A recent survey of companies in the eurozone’s manufacturing and services sectors signaled a steep decline in output in October. The outlook for demand for goods and services also worsened.

Last week, the European Central Bank kept interest rates unchanged — breaking a spell of 10 consecutive rate hikes — following a sharp drop in eurozone inflation in September and more evidence of economic weakness. ECB President Christine Lagarde warned that risks to growth “remain tilted to the downside” and said the Israel-Hamas war meant a “less predictable” outlook for energy prices.

Still, third-quarter GDP data in the euro area is a “mixed bag so far,” according to Bert Colijn, senior eurozone economist at Dutch bank ING. He pointed out that, while Germany and Austria contracted, Belgium and Spain grew strongly. “This makes it likely that eurozone GDP did not contract in the third quarter — but a small decline in the fourth quarter is a realistic prospect,” he wrote in a note.

Euro area GDP data is due out Tuesday.