The federal government and several economists are hoping for slight economic growth in the first quarter. The Bundesbank is less optimistic about this. Among other things, the high inflation and the bad mood in the industry should lead to a recession, according to the monthly report.
According to the Bundesbank’s forecast, the German economy will shrink again at the beginning of the year and thus slide into a recession. “Economic output is likely to be lower again in the first quarter of 2023 than in the previous quarter,” says the monthly report. At the end of 2022, Europe’s largest economy had already shrunk by 0.2 percent after robust growth in the summer. If there are two negative quarters in a row, there is talk of a recession.
Industrial production started the year from a depressed level, while exporters struggled with falling foreign demand. The construction industry is also likely to cool down further in view of increased interest and material costs. “In addition, inflation remains high and continues to reduce the purchasing power of private households,” according to the economists at the German Bundesbank. “Private consumption should therefore also fall at the beginning of 2023.”
The Bundesbank is not exuding much optimism for the rest of the year either. “Things could slowly pick up again as the year progresses,” said the central bank, which then expects exports to pick up. “But there is still no sign of any significant improvement.” For the year as a whole, gross domestic product is likely to “decrease slightly”, but not as much as feared in December. At that time, the Bundesbank had predicted a calendar-adjusted minus of 0.5 percent. The federal government and some economists now believe that slight growth is possible.
The Bundesbank also expects a higher government deficit. “Overall, expenditure is likely to increase much more than income,” she expects. “Contributing to this is that the high inflation, among other things, makes government purchases of goods and investments more expensive.” In addition, spending on defense and climate policy is likely to increase significantly. “In the case of government revenue, on the other hand, the boom in profit taxes in the previous year suggests that they will now grow much more slowly.”
Temporary support measures such as electricity and gas price brakes are likely to expire again in 2024. However, according to its medium-term financial planning, the federal government “still has significant deficits in its extra budgets, especially in the funds for climate policy and the Bundeswehr”.
