The gloom hanging over the eurozone economy has darkened after the closely followed Ifo Institute cut its forecast for German growth over the next two years.

The Munich-based think-tank added its voice to those warning that a sharp slowdown in German manufacturing will spread to the services sector and push up unemployment.

The German economy shrank by 0.1 per cent in the second quarter and most economists predict a similar performance in the third quarter will drag the country into a technical recession.

The Ifo cut its forecast for German gross domestic product growth this year from 0.6 to 0.5 per cent and lowered its estimate for next year from 1.7 to 1.2 per cent. A third of next year’s growth comes automatically from the higher than average number of working days.

The warning comes as the European Central Bank is on Thursday expected to announce a fresh wave of monetary stimulus, including a potential cut in interest rates and restarting of its bond-buying programme in response to sluggish growth and persistently low inflation.

“The German economy is at risk of falling into recession,” said Timo Wollmershaeuser, head of forecasts at the Ifo. “Like an oil slick, the weakness in industry is gradually spreading to other sectors of the economy, such as logistics, one of the service providers.”

He added that the Ifo’s gloomy forecast did not assume a disruptive EU exit by the UK or an escalation of the US-China trade war. It also forecast that German growth would rebound only slightly to 1.4 per cent in 2021.

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Amid signs that the slowdown in manufacturing is starting to hit the German labour market, the Ifo predicted that the number of unemployed people would rise next year from 2.28m to 2.31m.

The Ifo’s move came a day after an even more gloomy assessment was published by the Kiel Institute for the World Economy, which forecast that the German economy would shrink 0.3 per cent in the third quarter, dragging overall growth down to only 0.4 per cent this year.

“Such weak figures were last seen in 2013 in the wake of the euro debt crisis,” said the IFW. “However, the economy should pick up again in the middle of next year. In 2021, public budget balances enter deficit territory.”

Gabriel Felbermayr, president of the IFW, said: ““The real problem with Donald Trump’s trade disputes is not the tariffs themselves, but the great uncertainty about what is to come. Uncertainty is poison for investment decisions.”

However, he dismissed calls for a big fiscal stimulus from the government to stimulate the economy, saying: “There is no reason for policy actionism, for example through investment programmes that would above all fuel construction prices.”

Via Financial Times