IMF: meager growth prospects
Bundesbank sees the end of the recession
07/17/2023, 4:48 p.m
In the past two quarters, German economic output has declined. The Bundesbank estimates that this trend should have stopped in the spring. Lower inflation rates and higher wages supported consumption. However, a thorough recovery is still not in sight.
According to forecasts by the Bundesbank, the German economy has ended its recession in view of falling inflation and rising wages. “German economic output is likely to have increased slightly again in the second quarter of 2023,” says the monthly report. In the two previous quarters, gross domestic product had shrunk by 0.5 and 0.3 percent – economists speak of a technical recession if there are two declines in a row. At the end of the month, the Federal Statistical Office intends to make an initial estimate as to whether there was actually enough growth in the spring quarter just ended.
“Private consumption, which had previously fallen sharply, has stabilized,” said the Bundesbank, explaining its optimism with regard to the spring. “Contributing to this was that the labor market was still in good shape, wages rose sharply and price increases did not accelerate any further.” The service providers should also have benefited from this. At the beginning of the year, the inflation rate was still 8.7 percent, which depressed consumers’ purchasing power. The inflation rate is currently significantly lower at 6.4 percent. Collective bargaining agreements in some sectors, including tax-free inflation premiums, more than made up for this in some cases.
According to the Bundesbank, easing supply bottlenecks also speak in favor of an end to the recession. “Together with the high backlog of orders, they prevented poorer results in industry and construction,” it said. However, both sectors could not have expanded their production compared to the previous quarter. “Industry was slowed down by the fact that foreign demand fell,” writes the Bundesbank: “In addition, the increased financing costs dampened domestic investment.”
This continues to burden the demand for construction services “to a considerable extent”. The European Central Bank (ECB) has raised interest rates sharply in the fight against inflation. This drives up the financing costs for construction, which is why many projects are currently on hold.
According to the Bundesbank economists, the economic recovery in the further course of the year could be “slightly more hesitant” than expected in the June forecast. In it, the economists estimated a drop in gross domestic product of 0.3 percent for the current year. At the same time, they assumed that the economy would only pick up gradually in the second half of the year.
According to a study, however, the danger of a recession increased dramatically until late summer. According to the Institute for Macroeconomics and Business Cycle Research (IMK), the probability of this has skyrocketed to 78.5 percent for the period from July to the end of September. In June it was still 49.3 percent. The IMK indicator, which works according to the traffic light system – which bundles data on the most important economic parameters – is therefore on “red”. This signals an acute risk of recession.
The International Monetary Fund (IMF) also sees only meager economic prospects for Germany. In his most recent analysis, he points out that the local economy coped well with the energy shock in the wake of the Ukraine war and nevertheless slipped into recession. In view of the after-effects of the energy crisis and the tightening of financing conditions as a result of the turnaround in interest rates, a slight contraction in economic output can be expected for 2023 as a whole.
Growth is expected to gradually pick up momentum in 2024 and 2025 as the after-effects of interest rate hikes fade and the economy gradually digests the energy shock.
In the medium term, however, the IMF believes that growth prospects are subdued. Average growth rates of less than one percent can be expected due to the aging of the population and the lack of progress in productivity as well as bottlenecks on the labor market.