The German economy contracted by 0.5% (q-o-q) in Q2 as domestic demand weakened considerably (the figures were released after our survey date). The chancellor, Angela Merkel, had already warned of an inevitable "cleareconomic slowdown" as payback for the first quarter's robust 1.5% (q-o-q) performance. Indeed, the Q1 expansion was boosted by statistical factors which likely depressed the Q2 figure. Consequently, 2008 GDP forecasts have slipped this month, with our panel now predicting 2.0%. The manufacturing sector has continued to weaken, with the purchasing managers index falling further in July following factory output and new orders dropping sharply in June. Producers are struggling with high inflation which has raised production costs and simultaneously eroded consumers' purchasing power. Moreover, exports are faltering, with disappointing external demand leading the huge fall in orders in June which was hindered by the strong Euro and weakening global economy. In the current climate, business and investor confidence has fallen markedly as concerns mount.
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