German Economic Outlook is Improving Slightly

German Economic Outlook is Improving Slightly

Germany’s economic outlook has improved somewhat after the better-than-expected contraction in the fourth quarter. Inflation also seems to have passed its peak, although it may take longer before the price rises decrease without the sharply fluctuating energy prices.

The Bundesbank reported this in its monthly economic report on Monday.

The German economy contracted by 0.2 percent in the fourth quarter compared to the third quarter. In the last quarter of 2022, the largest economy in the eurozone had to contend with, among other things, a decline in consumer spending after three-quarters of growth. However, the contraction remained limited thanks to the mild winter, lower energy prices and surprisingly resilient business confidence.

“The short-term outlook is currently more favourable than a few months ago,” the German central bank said. The economy of the Netherlands’ important trading partner was also supported by a strong labour market and improving global conditions. Moreover, around the turn of the year, business and consumer sentiment worldwide slightly enhanced, with fears of a recession diminishing somewhat, said the Bundesbank, also pointing to the absence of a major energy crisis in Europe.

The Bundesbank did warn that the rapid rise in wages will trigger a second wave of inflation, which will mean it will take longer for overall inflation to ease. “Wage growth will help keep eurozone inflation well above the 2 percent target for an extended period.”

Despite inflation, the Bundesbank said the economy could still do “slightly better” than its forecast of a contraction of 0.5 percent this year, issued in December. Germany is expected to slip into recession this quarter. In the course of the year, according to the Bundesbank, the situation could slowly improve, but a “significant improvement” is not in sight. The European Commission is more optimistic about the German economy and expects a slight growth of 0.2 percent this year.

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