Inflation slows recovery
Bundesbank draws hope – but GDP minus expected
06/16/2023, 11:10 am
Although the German economy is slowly recovering, the weak winter half year is depressing the Bundesbank’s overall forecast: the bottom line is that GDP is expected to fall by 0.3 percent. The reason for the laborious upswing is the still cripplingly high inflation.
According to the Bundesbank, high inflation will slow down the German economy in the current year. Europe’s largest economy is struggling to recover from the crises of the past three years. “The German economy is still struggling primarily with the consequences of high inflation. This reduces the purchasing power of the citizens,” explained Bundesbank President Joachim Nagel when presenting the latest forecasts from the central bank.
In the current year, the economy is slowly regaining its footing. Due to the decline in gross domestic product in the winter half-year, economic output will shrink by 0.3 percent for the year as a whole, the central bank predicted. The Bundesbank is somewhat less pessimistic than it was in December, primarily because of the easing on the energy markets. At that time, she had assumed that economic output would shrink by 0.5 percent in 2023 as a whole.
Despite the recent decline, experts are still not giving the all-clear on inflation. Inflation excluding energy and food – the so-called core rate – is proving to be stubbornly high. For 2023, the Bundesbank expects overall inflation to fall from 8.7 percent last year to 6 percent. In the next two years, the rate of inflation – measured by the harmonized index of consumer prices (HICP), which is decisive for monetary policy in the euro area – should therefore fall to 3.1 percent and 2.7 percent respectively. The European Central Bank (ECB) is aiming for an inflation rate of 2.0 percent in the common currency area in the medium term, at which it sees price stability.
The Bundesbank experts expect that falling inflation, rising wages and a robust labor market will strengthen people’s purchasing power in the near future and that consumption, an important pillar of the economy, will increase. However, the tighter monetary policy of the ECB, which has meanwhile raised interest rates in the euro area for the eighth time in a row in the fight against high inflation, is leading to higher financing costs. This dampens private investment, especially in residential construction.
“All in all, we expect economic growth of 1.2 percent and 1.3 percent in 2024 and 2025, respectively,” said Nagel. The forecast for the next two years has thus been lowered. In December, the central bank still expected growth in Europe’s largest economy of 1.7 percent in 2024 and 1.4 percent for 2025.