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Bundesbank and Deutsche Bank stoke German recession fears

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
A German flag blows in the wind at Bellevue Castle in Berlin, Germany. Photo: Inga Kjer/Photothek via Getty Images

Fears over the health of the German economy are growing after both Deutsche Bank and the country’s central bank warned of a looming recession.

The Bundesbank, Germany’s central bank, warned on Monday that “economic performance could again decline slightly” in the third quarter. If this happens, it would tip Germany into recession.

Separately, Deutsche Bank has cuts its growth forecast for the year and said it believes Germany is already in recession.

READ MORE: Germany economy could continue to shrink - Bundesbank

“We see Germany in a technical recession, as we expect another 0.25% GDP drop in Q3,” Deutsche Bank’s chief economist Stefan Schneider wrote in a note sent to clients on Friday.

A technical recession is two quarters of contracting economic activity. Deutsche Bank’s prediction comes after data last week showed the German economy shrunk by 0.1% in the second quarter, signalling “the end of a golden decade for the German economy.”

As a result, Deutsche Bank trimmed its forecast for full-year growth in Germany to 0.3% this year and 0.7% in 2020.

The investment bank warned larger downgrades to growth may be necessary if certain geopolitical factors turn against Germany. Deutsche Bank said the US-China trade conflict and Brexit were the two biggest risk factors to forecasts.

READ MORE: Recession beckons for Germany as economy contracts

“The probability that one or more of these key assumptions might turn out differently, i.e., worse than assumed, is unusually high, in our view,” Schneider wrote. “In such a case, another reduction by a few tenth of a percentage point might not be sufficient, as we might find ourselves in a completely different scenario.”

A hard Brexit, which looks increasingly likely, would damage the German economy, as would a prolonged US-China trade war that depressed Chinese demand for German imports.

However, Schneider said these events were “unpredictable” and so Deutsche Bank was not building possible negative fallout from them into its economic forecasting models.

“Even the best attempts trying to assess the actual size of the impact need to be taken with a large grain of salt,” he wrote.

“It is probably fair to say that with respect to both events the market consensus has been much too optimistic and failed to see the permanent deteriorations in both during the last few quarters.”