Bundesbank: Recovery Progresses Slowly – Uncertainty on the Rise

Despite the German economy having left the recession behind, a true upswing is not evident, according to the Bundesbank

The German economy is displaying limited momentum during the summer. “In the third quarter of 2023, the German economy is expected to remain nearly unchanged,” stated economists in their recently published monthly report for August. Despite stable employment and significant wage increases coupled with decreasing inflation rates, private consumption might continue to recover. For this year, the Bundesbank forecasts a negative GDP growth of 0.3 percent.

Experts Predict Minimal Growth in the Second Half of the Year

At the end of 2022 and the beginning of 2023, the German economy contracted, leading to a technical recession. Preliminary data from the Federal Statistical Office shows that the GDP remained unchanged in the second quarter. Detailed GDP figures will be released by Destatis on August 25.

For the third and fourth quarters, leading economic experts predict a minimal growth of 0.2 percent each. However, the Bundesbank anticipates stagnation during the summer months. The Ifo Institute in Munich is even more cautious, expecting a slight decline in the third quarter.

Consumption on the Rise

The Bundesbank justifies its forecast with the ongoing stabilization of previously fluctuating private consumption. A stable job market and substantial wage increases contributed to this trend, while inflation remained steady. “The further development heavily relies on the persistence of high inflation rates,” said Wohlrabe. The future interest rate policy of the ECB also plays a role.

The economist emphasizes that high inflation is the “greatest risk” for the economy in the medium term. The Bundesbank expects an average inflation rate of 6 percent for this year.

Recent consumer price developments particularly favoured the service sector. Households recently increased their spending on travel, and the retail sector reported slightly higher revenues in a year-on-year comparison. However, the automobile market in Germany experienced a decline.

Declining International Demand

The industry is burdened by reduced international demand. Additionally, rising interest rates and increased financing costs are dampening corporate investment willingness. This is having a negative impact on the construction sector: In the first half of the year, the number of building permits decreased by 27 percent. Given these developments, concerns are growing in the industry, as emphasized by Felix Pakleppa, the CEO of the Central Association of the German Construction Industry.