2019.09.2308:22:00UTC+00German Recession Part Of Cyclical Return To Normality, Says Bundesbank

Germany is likely to enter a technical recession in the third quarter, but it not a cause for concern, Bundesbank said in its monthly report released Monday.

Elsewhere, the IHS Markit survey showed that Germany's private sector contracted the most since late 2012 in September as the downturn in manufacturing deepened and service sector growth lost momentum.

The central bank expects only a slight decline in GDP overall in the third and second quarters. Such a decline should currently be seen as part of a cyclical return to normality as the German economy emerges from a period of overheating, the central bank said.

The economy contracted 0.1 percent in the second quarter. A technical recession is defined as two consecutive quarters of decline in economic output.

The bank noted that a mild recession does not necessarily represent the end of the period of aggregate expansion, as the contraction is confined largely to industry.

The flash composite Purchasing Managers' Index declined to 49.1 from 51.7 in August, the IHS Markit survey showed. That was the first reading below the 50 'no change' threshold since April 2013.

Phil Smith, principal economist at IHS Markit, said the economy is limping towards the final quarter of the year and, on its current trajectory, might not see any growth before the end.

The services PMI came in at a 9-month low of 52.5 versus 54.8 a month ago. The reading was expected to fall to 54.4.

The factory PMI plunged unexpectedly to a 123-month low of 41.4 compared to 43.5 in August.

Meanwhile, Germany's Mechanical Engineering Industry Association, orVDMA, predicted a 2 percent decline in production in 2020. The industry lobby also confirmed a 2 percent contraction for this year.

The VDMA said global economic weakness, trade disputes and industrial structural change are weighing on business in mechanical engineering. Moreover, the association said an upswing is not yet in sight.