Status: 02/20/2023 3:19 p.m
According to the Bundesbank, the German economy also shrank at the beginning of the year – which would have slipped it into recession. The central bank experts are only slightly more optimistic for the rest of the year.
According to estimates, the German economy got off to a weak start in the new year. “Economic output in the first quarter of 2023 is likely to be lower again than in the previous quarter,” writes the central bank in its monthly report for February, which was published today.
This would have slipped Germany into a winter recession: if the gross domestic product (GDP) falls for two quarters in a row, economists speak of a so-called technical recession. At the end of 2022, Europe’s largest economy had already shrunk by 0.2 percent after robust growth in the summer. However, if the decline in economic output continues at this rate, it would only be a mild recession.
Private consumption suffers
The Bundesbank’s economists state that the tension on the energy markets and the associated uncertainty have eased significantly. For example, the government electricity and gas price brakes mitigate the increase in energy costs for private households and companies. Investment and industrial production should benefit from this.
“On the other hand, after the significant decline in December 2022, industrial production started from a depressed level in 2023,” explained the Bundesbank. “This also applies to exports, which are also being dampened by falling foreign demand.” Private consumption continues to suffer from persistently high inflation, which is reducing the purchasing power of private households. The construction industry is expected to cool down further. “Private consumption should therefore also fall at the beginning of 2023.”
“Things could slowly pick up again as the year progresses,” predicts the Bundesbank. “But there is still no sign of any significant improvement.” All in all, according to the Bundesbank’s current estimate, German economic output should “decrease slightly” on average in 2023, but develop slightly better than expected in December. In December, the Bundesbank had predicted a GDP decline of 0.5 percent for 2023.
Higher government deficit expected
The Bundesbank also expects a higher government deficit. “Overall, expenditure is likely to increase much faster than revenue,” says the report. “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 the electricity and gas price brake will probably 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”.
Houses and apartments continue to be overpriced
In its monthly report, the Bundesbank also addresses the German real estate market. According to this, houses and apartments in Germany are still often overpriced, despite recent falling prices. In the cities, residential property prices in 2022 were still between 25 and 40 percent above the justified level. “In view of the sharp price increases in the first half of the year, residential real estate in Germany was about as overvalued on average as before,” write the Bundesbank experts.
According to the monthly report, the scope for financing has been severely restricted for many prospective buyers of apartments. The disposable income of private households would have increased significantly in 2022 with an increase of a good seven percent. However, high inflation has eroded purchasing power.
Higher interest rates on home loans
In addition, the interest rate for mortgage loans has risen sharply to 2.6 percent on an annual average, which has massively dampened demand for residential real estate. “The bottom line is that the affordability of residential real estate has deteriorated significantly and was below the level before the outbreak of the financial and economic crisis in 2008/09,” according to the Bundesbank.