Lower decline than last time: Bundesbank expects recession

Decrease smaller than last
Bundesbank expects recession

According to the Bundesbank, the German economy is doing well, but the road to recovery is long. Industry and construction grew vigorously. But exports are sluggish and everything to do with consumption is being slowed down considerably by high inflation. However, their increase is likely to slow down.

The Bundesbank is anticipating a recession in Germany due to persistently high inflation. “All in all, German economic activity will probably fall again in the current quarter,” says the monthly report of the German central bank. “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 therefore more pessimistic than some of the leading economic institutes, which predict growth for January to March in their spring forecast. 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.

According to the monthly report, industry and construction again increased their production strongly in January. However, exports of goods only partially recovered. “In addition, the consumer-related sectors of the economy are still suffering from persistently high inflation and the resulting reluctance of consumers,” the Bundesbank justified its pessimism. In retail, for example, sales remained at the already depressed level of the previous month: “At the beginning of 2023, the German economy only recovered with difficulty from the broad-based and strong setback from December last year.”

At the same time, the Bundesbank expects inflation to ease: “In March, the inflation rate in Germany should fall significantly due to a base effect.” After the Russian invasion of Ukraine, energy prices had skyrocketed in March 2022, which has so far been reflected in a significantly higher inflation rate, which was 8.7 percent in January and February. “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,” it continues.

But the all-clear is not given: the so-called core rate, which excludes energy and food prices, has proven to be extraordinarily persistent. According to the Bundesbank, it could even increase slightly towards the middle of the year. Experts see a higher core rate as a signal that companies are passing on higher energy costs to consumers.

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