The German economy is still floundering, but there are new signs of hope. The Bundesbank expects the recovery to continue – even if there are still headwinds.
The German Bundesbank is increasingly seeing bright spots for the German economy. The economic recovery is continuing, according to the central bank’s monthly report published today. Real gross domestic product (GDP) – the sum of all goods and services produced – is likely to rise again slightly in the second quarter.
“While the German economy continues to face headwinds, there are increasing bright spots,” wrote the experts. In the first quarter, Europe’s largest economy, supported by exports and increased construction investments, surprised with mini-growth of 0.2 percent.
Industry emerges from weak phase
According to experts, the industry is slowly emerging from its weak phase. Production increased in April and there are signs of improvement, especially in demand from abroad – albeit from a low level.
Private consumption, which failed to support the economy at the beginning of the year, could therefore increase somewhat in the current quarter. Consumers were still reluctant to spend more at the beginning of the quarter. However, thanks in particular to sharply rising wages, consumers’ spending flexibility is currently improving noticeably, the experts explained.
Interest rates weigh on investments
However, according to the information, increased interest rates continue to dampen investments. This is particularly affecting residential construction. “In the construction industry, production fell again significantly in April after being supported by the exceptionally mild weather in the first quarter.”
Interest rates were raised sharply within a very short period of time due to the price increase following the start of the war in Ukraine. According to the Bundesbank’s forecast, inflation in Germany is expected to settle around the current level in the coming months.
The inflation rate is likely to fluctuate sideways. This is mainly due to the fluctuating energy prices last year, the economists write. Statistical effects will contribute to the inflation rate falling slightly until September, but then rising again until the end of the year.
Hoping for the recovery
In its latest forecast from the beginning of June, the Bundesbank expects German economic output to grow by 0.3 percent for the year as a whole.
In the medium term, the central bank’s economists expect a slightly stronger increase of 1.1 percent in 2025 and 1.4 percent in 2026. In the fourth quarter of 2023, Europe’s largest economy had shrunk by 0.5 percent.
Ifo Institute doubles growth forecast
The ifo Institute has now doubled its forecast for growth this year. According to the forecast, economic output is expected to increase by 0.4 percent. In March, the Munich-based researchers had predicted an increase of 0.2 percent.
An acceleration to 1.5 percent is still expected for the coming year. “In football, things are now going well for us, but unfortunately the economy is not yet doing so,” said ifo economics chief Timo Wollmershäuser in view of the German national team’s two victories at the European Championships on home soil. “We are slowly working our way out of the crisis. The emphasis is on slowly.”