The Bundesbank expects a recession in Germany due to persistently high inflation. "All in all, German economic activity is likely to decline again in the current quarter," the German central bank predicted in its monthly report on Monday. "However, the decline is likely to be smaller than in the final quarter of 2022." From October to December, gross domestic product fell by 0.4 percent. With two negative quarters in a row, economists speak of a "technical recession". The Bundesbank is thus more pessimistic than some leading economic institutions, which forecast growth for January to March in their spring forecast.
Consumer-related economic sectors continue to suffer
The Kiel Institute for the World Economy (IfW), for example, predicts an increase of 0.2 percent, and the IWH in Halle also expects an increase. Industry and construction increased their production strongly again in January, according to the monthly report. However, exports of goods had only partially recovered. "In addition, the consumer-related sectors of the economy continue to suffer from persistently high inflation and the resulting consumer restraint," said the Bundesbank, explaining its pessimism. In the retail sector, for example, sales remained at the already depressed level of the previous month: "At the beginning of 2023, the German economy recovered only with difficulty from the broad-based and strong setback of December of last year."
At the same time, the Bundesbank expects inflation to ease: "In March, the inflation rate in Germany is likely to fall significantly due to a base effect." After Russia's invasion of Ukraine, energy prices skyrocketed in March 2022, which has so far been reflected in a significantly higher inflation rate, which stood at 8.7 percent in January and February respectively. "From March, on the other hand, the increased price level forms the basis for calculating the inflation rate, which is reflected in a lower overall rate," says the monthly report.
Economic activity will fall again
However, the all-clear is not given: the so-called core rate, at which energy and food prices are excluded, has proven to be extraordinarily persistent. According to the Bundesbank, it could even rise slightly in the middle of the year. Experts see a higher core rate as a signal that companies are passing on higher energy costs to consumers.
At the same time, the Bundesbank continues to expect a decline in gross domestic product (GDP) at the beginning of the year. "All in all, German economic activity is likely to fall again in the current quarter," the monthly report said. However, the decline is likely to be smaller than in the final quarter of 2022, when German economic output shrank by 0.4 percent compared to the previous quarter. If gross domestic product (GDP) falls for two quarters in a row, economists speak of a technical recession.
According to the Bundesbank, industry and construction increased their production strongly again in January. Adjusted for price increases, however, exports of goods had only partially recovered. In addition, persistently high inflation is slowing down people's consumption in Germany.