Germany likely in recession as recovery delayed, says Bundesbank

By Thomson Reuters Mar 21, 2024 | 6:03 AM

FRANKFURT (Reuters) – The German economy was likely in recession in the first quarter of 2024 as weak consumption and anaemic industrial demand continue to push the recovery further into the future, the Bundesbank said in a regular economic report on Thursday.

Europe’s biggest economy has struggled for the past year with surging energy costs and rising borrowing costs but a recent set of indicators, such as a sentiment figures from the ZEW economic research institute and fresh PMI data suggest that at least a bottom has been reached.

But the central bank’s analysis did not point to any meaningful recovery either, suggesting that 2024 will be another weak year for an economy traditionally considered Europe’s powerhouse.

“Industry in particular will likely remain in a weak phase,” the Bundesbank said. “No major stimulus is expected from private consumption for the time being either.”

New industrial orders remain poor with both domestic and export demand at low levels and only a still relatively high backlog is cushioning the sector.

High interest rates are weakening domestic demand, particularly for investments, but uncertainty over major issues, like climate policy, also weigh on investment decisions, the bank added.

While consumers are holding back spending, their buffers are increasing as inflation is falling and nominal wages are rising, so spending capacity is at least building up.

Inflation could fall further in the coming months but some fluctuation is likely and price growth in services will come down only slowly, the Bundesbank added.

Despite Germany’s muted economic prospects, firms continue to hold onto their workers and unemployment is only expected to rise slightly in the coming quarter, the bank said.

Firms struggled to rehire workers when the economy opened up after the pandemic so they have been hoarding labour despite a year of no growth on the premise that it was still cheaper to maintain a steady workforce than to struggle during an upturn.

(Reporting by Balazs Koranyi; Editing by Toby Chopra)