The economic outlook for Germany has improved somewhat after a better-than-expected contraction in the fourth quarter. Inflation also seems to have peaked, says the German Bundesbank in its monthly economic report. It is expected that it will take some time before prices really start to fall.
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, thanks to the mild winter, lower energy prices and surprisingly resilient business confidence, the contraction remained limited.
The short-term outlook is currently more favorable than a few months ago. The economy of the Netherlands’ important trading partner was also supported by a strong labor market and improving global conditions. Around the turn of the year, sentiment among entrepreneurs and consumers worldwide improved slightly, while fears of a recession diminished somewhat, said the Bundesbank, which also pointed 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 inflation in the eurozone well above the target of 2 percent for an extended period of time.”
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. The situation will gradually improve in the course of the year, according to the Bundesbank, but a ‘significant improvement’ is not in sight. The European Commission is more positive about the German economy and expects a small growth of 0.2 percent for this year.