Germany’s economy is currently facing a myriad of challenges, casting a shadow of uncertainty over its outlook. Despite a brief recession at the beginning of the year, the German economy is still grappling with various factors that are impeding its growth prospects. These include elevated inflation, high interest rates, a sluggish recovery in its crucial export market of China, elevated energy costs, all of which are exerting downward pressure on economic activity.

The Ifo index has experienced a second consecutive monthly drop after six months of expansion. The decline in the index, now standing at 88.5 compared to 91.7 in May, is attributed to multiple factors such as the slower rebound of the Chinese economy, concerns of a looming recession in the United States, and ongoing monetary policy tightening.

The June disappointing reading of the Ifo index indicates that the anticipated recovery of the German economy may be nothing more than wishful thinking. Optimism is waning, and concerns about growth are mounting. It is important to note, however, that this does not imply an extended period of recession in the years to come. Rather, with a combination of short-term challenges and long-term structural issues, it is likely that growth will remain subdued at best.

It is evident that the initial optimism about the economy has given way to a more realistic perspective. A combination of factors including weakened purchasing power, reduced industrial order volumes, and the impact of the most stringent monetary policy tightening in decades, all point towards a period of weak economic activity.

Moreover, structural challenges such as the ongoing conflict in Ukraine, demographic shifts, and the ongoing energy transition will continue to pose long-term obstacles to Germany’s economic growth. However, amidst these challenges, there are glimmers of hope. The faltering rebound of the Chinese economy could still yield temporary positive surprises, while a decrease in headline inflation, coupled with declining energy and food prices, along with rising wages, should provide support to private consumption in the latter half of the year.

According to leading economic institutes, Germany’s growth prospects appear relatively lacklustre, with projections indicating growth of less than one percent in the coming years. This is compounded by persistent structural weaknesses, including bureaucratic inefficiencies, a low level of digitalization, and an aging population that could lead to labour shortages, all of which are impeding the country’s economic performance.

The Bundesbank, in its monthly report, suggests that the recession in Germany is expected to conclude in the spring quarter, with a modest increase in gross domestic product anticipated. This uptick is expected to be supported by the resilience of German industries in coping with declining demand, thanks to lower energy prices, alleviation of supply bottlenecks, and robust order books.

Looking ahead, the Bundesbank predicts a decline of 0.3% in GDP for 2023, followed by a gradual recovery with growth rates of 1.2% in 2024 and 1.3% in 2025.

Source: Tradingview

Despite the current macro backdrop, the leading German DAX 40 index has posted a fresh record high of 16,427 on the 16 ^th of June 2023. While at this juncture in time the sequence of higher highs and higher lows is intact, suggesting that the up trend is still in force, the medium-term up trend line has been breached recently showing that the trend is deteriorating.

The leading Relative Strength Index (RSI) has formed a quadruple bearish divergence on the daily chart, showing that internal momentum conditions are also deteriorating. Given the proximity of the new all-time high to the previous peak of the 2022 bear market and the formation of such a large bearish divergence, the current set up casts bearish light on the chart.

A double top pattern appears to be forming as well, showing that the bears are stepping into the market. While the pattern is not confirmed at this stage, a break below support of 15,629 would provide the required confirmation with the breakout targeting 15,000 initially.

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