The technical recession that Germany had entered has ended as inflation falls, wages rise and supply bottlenecks ease, according to the Bundesbank’s monthly report. The regulator’s data is optimistic after two consecutive quarters with negative GDP.
For the year as a whole, the Bundesbank forecasts a contraction of the economy of 0.3%, but predicts a slight increase in economic output in the second quarter of 2023. The business climate, however, darkened notably in June, from Hence, the economic recovery throughout the year could be somewhat more hesitant than expected in the June forecasts.
In the absence of definitive data, the Bundesbank highlighted in its monthly report that the great evil of inflation is receding. From the 8.7% registered at the beginning of the year, the price index has fallen to 6.4%, although it is still well above the 2% objective of the European Central Bank (ECB) for the euro zone in the medium term.
The trend, however, is positive. German economic output is likely to have increased slightly again in the second quarter of 2023 and the fall in private consumption has stabilized in spring. Revenue expectations, in particular, rose significantly.
In the retail sector, price-adjusted sales increased again in May. Additionally, households likely returned to spending significantly more on travel, while car purchases declined significantly, according to the monthly report. Service providers also benefited from the improved consumer climate: their output rose sharply in April compared to the previous quarter and their business situation also improved significantly in the second quarter, according to Ifo Institute surveys.
Despite the weak economic evolution, the labor market remained stable, despite the fact that the notable increase in employment of the previous months came to a halt in May. In most sectors, the number of jobs filled has stagnated. Fewer people subject to Social Security contributions were employed in commerce and temporary work, which suffered from the reluctance of households to spend. In June, the Institute for Economic Research (Ifo) employment barometer largely held at the previous month’s subdued level, while the leading indicator fell. Bundesbank analysts therefore do not expect an increase in employment in the coming months-
Seasonally adjusted, registered unemployment increased significantly in June by 28,000 people, up to 2.61 million, and the corresponding rate increased by 0.1 percentage points, up to 5.7%. Experts expect unemployment to continue rising in the coming months due to the slow economic recovery and the completion of labor market policy measures and integration courses.
In June, the Harmonized Index of Consumer Prices (HICP) rose 0.5% from the previous month, seasonally adjusted. “Energy prices were largely unchanged and food prices rose less than in the previous month,” the monthly report said. However, the increase in the prices of non-energy industrial goods and services remained above average.
Compared to the previous year, the HICP rate rose notably from 6.3% to 6.8%, but experts attribute this to a special effect due to the temporary introduction of the fuel discount and the nine-euro note in June 2022. As of September, the special effects are likely to have a dampening effect and thus ensure a further decline in the inflation rate in Germany. Furthermore, the Bundesbank assumes that the recent declines in the prices of intermediate products will gradually be passed on to consumers. By contrast, the core rate excluding energy and food is likely to remain very high over the summer, particularly as package tours have returned to much more weight since the pandemic and their prices are likely to see a usual maximum in summer.
Last Friday, the Bundesbank announced that the inflation expectations of German consumers fell significantly again in June, so that the expected twelve-month inflation rate fell from 5.3% to 4.8%. It is the eighth time in a row that expectations have fallen. Long-term inflation expectations for the next five years also fell notably, from 5.1 to 4.7%.
This is an important piece of information, since inflation expectations play a fundamental role in the ECB’s monetary policy. If households expect high inflation, they often demand more wages and salaries, which can further fuel inflation. Experts talk about second round effects. Compared with its peak of 8.2% in October 2022, near-term inflation expectations have fallen 3.4 percentage points, according to the Bundesbank. A third of those surveyed now expect inflation rates to come down.
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