In its monthly report, the Bundesbank, Germany’s central bank, has issued a cautionary note about the German economy, suggesting that it may shrink more than anticipated this year. Despite a modest rebound in the second quarter, the country continues to grapple with the repercussions of declining global demand for goods, primarily caused by higher borrowing costs and a shift in consumer spending habits in the post-pandemic era.
Germany, known for its industry-heavy base, has been significantly affected by the drop in global demand for goods. As people prioritize leisure, travel, and other services over traditional goods, investment has been dampened, leading to a contraction in the economy. The Bundesbank’s report indicates that while there was a slight growth in the three months leading up to June, the outlook remains grim compared to their previous estimate of a 0.3% contraction this year, which was released just a few weeks ago. Worsening sentiment, as highlighted in a survey by the Ifo institute, has contributed to this downbeat assessment.
The Bundesbank acknowledges that consumer spending has stabilized, which may have contributed to the marginal growth in the second quarter. However, concerns loom large over the coming months as the economic recovery could be more sluggish than initially projected. As we noted over the weekend, housing sector is under pressure with prices already falling by double digits in June. In addition, an article from the FT also flagged risks associated to the construction sector.
On the positive side, the report suggests that inflation may dip in the near future, largely due to base effects from fuel subsidies and a discounted rail ticket introduced last year, which will no longer be in effect from September. Additionally, lower prices for intermediate products, i.e., those used in producing other goods, are expected to gradually filter down to consumers, further tempering inflation.
Despite this, core inflation, which excludes the volatile elements of energy and food prices, is likely to remain high during the summer. A significant contributing factor to this is the increased weight given to package holidays in the inflation index following the easing of pandemic restrictions. The surge in demand for packaged holidays has contributed to the persistence of core inflation, despite other deflationary pressures.