German economy weakening

There are growing signs that the German economy will not really return to growth. In the winter half-year, Germany has already slipped into recession and there is no upturn in sight. Unfortunately, rather the opposite.

The situation has darkened for industry in particular. Both production and new orders fell in the spring and have not recovered since. In view of the weakening global economy, the situation is not expected to improve in the short term. The significant interest rate increases by the European Central Bank are also having a dampening effect, particularly on investment activity.

The outlook for services is better than for industry. But here, too, the outlook has clouded over; business expectations declined further in June. In addition, retail sales also declined slightly. Although the consumer climate has bottomed out, consumers are still pessimistic about the future. Most recently, the consumer climate has even deteriorated somewhat. This is also due to the fact that for many households inflation has so far outpaced income growth. Private consumption is also being supported by low unemployment, even if there are signs of a gradual slowdown on the labor market. The German economy is weakening more than many comparable economies in Europe. Although the German economy as a whole has come through the energy crisis robustly, individual sectors and especially low-income households are suffering badly.

This year, I expect the German economy to contract by 0.5 percent in my baseline scenario. Next year, there will be slight growth again (see Table). Inflation will remain high in 2023 but will approach the two percent target of the European Central Bank in 2024. As usual for the German economy, my baseline scenario is somewhat more pessimistic than the forecasts of some of my colleagues. Many of them now expect the economy to contract less in 2023.

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

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