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Germany has struggled since Russia's 2022 invasion of Ukraine
pushed up energy costs, and its vast, industry-heavy economy is
now in its fourth straight quarter of zero or negative growth,
weighing on all of the euro zone.
"There is still no recovery for the German economy," the
Bundesbank said. "Output could decline again slightly in the
first quarter of 2024. With the second consecutive decline in
economic output, the German economy would be in a technical
recession."
This weak performance has raised questions about the
sustainability of the German economic model and critics argue
that much of its energy-reliant heavy industry is now being
priced out of international markets, warranting an economic
transformation.
The government, however, has pushed back on gloomy projections,
arguing that it is merely a perfect storm of high energy costs,
weak Chinese demand and rapid inflation that temporarily holds
back growth but does not fundamentally question economic
strategy.
For now the weakness will persist, the Bundesbank argues.
Foreign industrial demand is trending down and the order backlog
is dwindling.
Firms are also holding back investment, partly because financing
costs have risen sharply since the European Central Bank pushed
up interest rates to a record high to combat inflation, the
central bank said.
High nominal wage growth is also impacting firms and strikes in
key sectors, such as transport, could also weigh on growth in
the quarter.
Disruption of shipping in the Red Sea will, however, not have a
significant impact because there is plenty of spare capacity in
shipping and because freight costs are only a minor part of the
overall cost of goods, the Bundesbank said.
While the outlook is weak, the bank said it expects no major
deterioration in the labor market, which has insulated the
economy so far, and Germany was not facing a broad-based,
prolonged recession.
"The weak phase in the German economy that has been ongoing
since the beginning of the Russian war of aggression against
Ukraine will thus continue," the bank added.
(Reporting by Balazs Koranyi; Editing by Hugh Lawson)
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