The German economy is at a heightened risk of entering a recession following a contraction in the second quarter coupled with declining consumer confidence.

Data from Destatis, Germany’s official statistics office, recorded a 0.1 percent drop in GDP between April and June this year, contrary to economists’ predictions of an upward revision.

Another quarter of shrinking GDP would mark a recession for Europe’s largest economy, which experienced similar struggles last year.

Germany’s manufacturing industry has been hit hard by high energy costs and complications in trade relations with China since 2022. Additionally, elevated interest rates have adversely affected the labor market and consumer sentiment.

A survey of purchasing managers indicated that private sector employment plummeted to its lowest level since the 2008-09 financial crisis in August.

Melanie Debono, a senior Europe economist at Pantheon Macroeconomics, noted that the industry recession is “reasserting itself after signs it may have been fading in previous months”.

New data released on Tuesday revealed that concerns about a weakening job market are poised to further dampen consumer confidence in September. GfK’s monthly survey reported a drop to -22 for September from -18.6 the previous month, driven by consumer worries over decreasing real incomes.

“Slightly rising unemployment figures, an increase in company insolvencies, and staff reduction plans at various German companies are causing a number of employees to worry about their jobs,” stated Rolf Bürkl, a consumer analyst at NIM, which contributes to the survey compilation.

These measures of consumer confidence serve as early indicators of economic growth, with the recent decline suggesting another weak third quarter.

Over the past two years, Germany has been one of the most underperforming economies in the European Union. Signs of continued weakness may influence the European Central Bank’s decision on another interest rate cut next month.

Traders anticipate another 25 basis-point reduction in the ECB’s three main rates in September, following its recent easing of monetary policy for the first time in five years. Ratesetters will be monitoring official inflation figures closely.

Analysts at BNP Paribas expressed optimism despite Germany’s weak outlook, stating that the essential drivers of the eurozone’s recovery, such as improving real incomes and a decreasing monetary policy squeeze, remain intact.

“However, we share the ECB’s concern about downside risks. Particularly concerning is the continued drop in Germany’s PMI employment index into contractionary territory,” they added.