Germany is likely to be in recession right now because external demand is weak, consumers are cautious, and domestic investment is hampered by high borrowing costs, according to the Bundesbank’s usual monthly report on Europe’s largest economy, released on Monday. Germany has struggled since Russia’s 2022 invasion of Ukraine raised energy costs, and its massive, industry-heavy economy is now in its fourth consecutive quarter of zero or negative growth, impacting the entire eurozone.
“There is still no recovery for the German economy,” the Bundesbank said. “Output could decline again slightly in the first quarter of 2024. With the second consecutive decline in economic output, the German economy would be in a technical recession.”
This poor performance has generated concerns about the German economic model’s long-term viability, with critics claiming that most of the country’s energy-dependent heavy industry is now priced out of international markets, necessitating economic reform.
The government, on the other hand, has disputed the grim estimates, claiming that it is simply a perfect storm of high energy costs, poor Chinese demand, and rapid inflation that is temporarily stifling GDP but does not call economic strategy into doubt.
The Bundesbank believes that the weakening will continue for the time being
Foreign industrial demand is declining, and the order backlog is diminishing. Firms are also holding back investment, owing to steep increases in financing costs since the European Central Bank raised interest rates to a record high to battle inflation, according to the central bank. Firms are also feeling the effects of high nominal wage growth, and strikes in crucial sectors such as transportation may have an influence on growth in the quarter.
Disruption of shipping in the Red Sea, however, will have little impact because there is plenty of spare capacity in shipping, and freight charges are only a small portion of the overall cost of commodities, the Bundesbank stated. While the forecast is bleak, the bank said it expects no significant deterioration in the labor market, which has so far protected the economy, and that Germany is not facing a broad-based, prolonged recession. “The weak phase in the German economy that has been ongoing since the beginning of the Russian war of aggression against Ukraine will thus continue,” the Bundesbank said.