FRANKFURT, April 22 (Reuters) – The German economy grew at a modest pace in the first quarter on healthy industrial and services output but higher energy prices and the uncertainty over the Iran war will likely weigh on the current quarter, the Bundesbank said on Wednesday.
Europe’s largest economy has been broadly stagnant for three years and the Iran war is now jeopardizing government hopes that a massive investment in infrastructure and defence will finally kickstart growth.
Although the war already hit consumer confidence at the end of the first quarter, the overall performance of the economy was largely unaffected due to strong business-related services, rising industrial sales and healthy exports, the Bundesbank said in a monthly report.
But headwinds are intensifying, the bank added.
“Looking ahead to the second quarter, only a slight expansion is anticipated, at best,” it said.
“Increasingly positive impulses from the more expansionary fiscal policy are expected to take effect,” the central bank said. “On the other hand, the effects of the war in the Middle East are expected to burden the German economy more broadly and noticeably.”
The Iran war has increased energy prices, created supply chain problems, raised uncertainty, lifted market-based interest rates, and worsened the export outlook, the bank said.
Aggravating problems, private consumption was already weakening before the war, then took a clear hit in March as higher fuel prices lowered households’ purchasing power.
“Export and business expectations point to a more subdued outlook,” the Bundesbank said. “This is likely due not only to the burdens of higher energy costs and supply chain disruptions, but also to concerns about weaker global demand in the wake of the war in the Middle East.”
(Reporting by Balazs KoranyiEditing by Alexandra Hudson)
