The Bundesbank says that Germany is going through a "phase of weakness" and foresees a new stagnation of GDP

MADRID, 21 Ago.

The Bundesbank says that Germany is going through a "phase of weakness" and foresees a new stagnation of GDP


The German economy is going through a "phase of weakness", after activity stagnated between April and June, after contracting one tenth of a point in the first three months of the year, according to the Bundesbank, the German central bank, which warns of that the 'European locomotive' is likely to remain stalled in the third quarter.

"Economic production is expected to stagnate more or less in the third quarter," the institution states in its monthly bulletin for August, where it considers it probable that economic activity in Germany will remain practically unchanged again between the months of July and September of 2023.

In this sense, the German central bank points out that, although the strength of employment and the strong growth of wages, as well as the decrease in inflation, will drive the recovery of private consumption and, therefore, of the service sector, it seems that industrial production will remain weak, as foreign demand has been on a downward trend.

Also, despite the fact that some sub-sectors of the industry and construction continue to benefit from a large order book and the reduction of bottlenecks means that orders can be processed more quickly, the higher financing costs "will continue to weigh" on investment and slowing down demand in construction.

In this regard, it warns that the higher financing costs as a result of the rate hikes by the European Central Bank (ECB) depressed the demand for construction works and capital goods and slowed down credit, including the substantial drop in demand for mortgages by families, as well as slowing down the demand for credit from companies.

"The German economy is still experiencing a phase of weakness," summarizes the Bundesbank, warning that the evolution of the real economy could have been even weaker if it were not for the backlog of orders in parts of industry and construction, the decrease in supply bottlenecks and the strength of the labor market, which acted as a tailwind for the economy.

On this issue, the Bundesbank points out that, despite the current phase of cyclical weakness, the labor market is proving to be quite robust, although the strong rate of employment growth has slowed notably and unemployment has experienced a moderate upturn, easing slightly the tightness of the labor market.

In any case, the institution points out that the leading indicators suggest that employment will remain stable in the coming months, and that unemployment will continue to rise only slightly.

Thus, after considerable wage growth in the second quarter, Germany's central bank sees upward wage deals likely in the coming months.

Regarding inflation, although the general rate fell from 8.8% to 6.9% in the second quarter of 2023 as a consequence of the fact that energy prices had increased considerably the previous year and this base effect is now has dissipated, services prices rose significantly so that the core rate, which excludes the volatile energy and food components, held stubbornly firm at 5.6% in the second quarter, up from 5.5 % of the previous quarter.

Thus, the Bundesbank anticipates that inflation, as things currently stand, will likely continue to decline further in the coming months, mainly thanks to an increasingly negative contribution from energy prices.

On the contrary, he points out that wage growth is likely to remain strong, even heading into the new year, so the inflation rate is likely to stay above 2% for longer.