German economy faces fragile and sluggish recovery

After the German economy experienced a small interim low in the winter half-year, the hoped-for upturn is likely to begin in the current second quarter. The upturn is likely to be tentative and fragile, at least for the time being.

German industry in particular is currently on the road to recovery. Both production and new orders increased in January and February, and supply chains have recently eased. Nevertheless, the situation is only expected to improve gradually as the weakening global economy acts as a brake. In addition, the continuing economic and geopolitical uncertainty and the significant interest rate increases by the European Central Bank are having a dampening effect on investment activity.

In the services sector, business expectations in Germany actually declined slightly in April after a period of recovery. In addition, retail sales have recently declined slightly. Although the consumer climate has bottomed out, consumers are still rather pessimistic about the future, partly because inflation has risen more sharply than incomes for many households. However, unemployment remains low, which is supporting private consumption. “The German economy is picking up. However, it is still clearly battered by high inflation and the energy crisis and is unlikely to develop too much momentum this year.

High inflation rates, war in Ukraine, concerns about financial market stability, uncertainty about China and the situation in Taiwan, as well as rising interest rates are just some of the numerous economic risks.

In my baseline scenario, I expect the German economy to experience a sluggish recovery. Overall, the economy will grow by 0.1 in 2023 on average. Economic output will grow by 1.2 percent in 2024. Inflation will remain high in 2023 but will approach the two percent target of the European Central Bank in 2024. My baseline scenario is somewhat more pessimistic than the forecasts of some of my colleagues. Many of them now expect the economy to expand more strongly in 2023.

In an alternative scenario, Germany experiences a more severe recession. In this case, the economy will contract -0.5 percent in 2023 and see an even more subdued recovery in 2024 with a growth rate of 0.8 percent.

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