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Period of weakness in the German economy could continue

German economic output contracted in the final quarter of 2023, according to the February Monthly Report. Fourth-quarter real gross domestic product (GDP) fell by a seasonally adjusted 0.3% on the quarter according to the Federal Statistical Office’s flash estimate, after virtually stagnating in the first three quarters of 2023. Order intake has been weak for some time now, and is likely to be a notable factor increasingly impacting on industrial output. Surveys by the ifo Institute show that the share of manufacturing firms reporting a shortage of orders has risen steadily since April 2023, reaching 37% at the end of the period under review. In addition, investment was dampened by higher financing costs and the end of the environmental bonus. Higher interest rates and unfavourable weather conditions featuring high levels of precipitation also weighed on construction output and construction investment. By contrast, lower inflation, the robust labour market and strong wage growth supported private consumption. However, households probably remained cautious with their spending.

 Some headwinds will probably persist into early 2024 as well and economic output may decline again somewhat in the first quarter. While this would mean the ongoing period of weakness in the German economy following the start of the Russian war of aggression against Ukraine would continue, there is still no evidence of a recession in the sense of a persistent, broad-based and distinct drop in economic output and no such recession is expected either, the economists write.

Labour market still fairly robust

The protracted bout of weakness in the economy has had only a mild impact on the labour market so far, according to the report. Despite a decline in economic output, employment increased by 28,000 persons in the fourth quarter. Staff levels were boosted above all in the areas of human health and social work, the public sector, and education and training. Positive employment developments were also seen in business services, transportation and warehousing. By contrast, staff levels declined slightly in temporary agency work and in trade.

In January, unemployment remained virtually unchanged, as was the case in December. The seasonally adjusted number of reported vacancies rose somewhat in December and January. “Thus, there are no signs that the weak economy will cause the labour market to worsen significantly,” the economists write. 

Inflation rate down again somewhat in absence of one-off effect

According to the Monthly Report, consumer price inflation (as measured by the Harmonised Index of Consumer Prices) eased again somewhat in January, falling from 3.8% to 3.1%. This was mainly due to the elimination of the base effect from the 2022 price-lowering Act on Emergency Aid for Natural Gas Heating for End Consumers (Erdgas-Wärme-Soforthilfegesetz), which had pushed up the December rate significantly. Moreover, food and non-energy industrial goods inflation dropped considerably. By contrast, growth in prices for services gained momentum at the beginning of the year. Rents went up markedly and numerous insurance premiums became significantly more expensive. In addition, prices in restaurants and cafés recorded an extraordinary surge, reflecting the expiry of the temporary VAT cut for meals eaten in catering establishments. 

The Bank’s economists expect the inflation rate to generally continue to fall in the coming months. However, the year-on-year rate could fluctuate sharply owing to various base effects from energy and local public transport. Easter falls earlier this year than last, and this, too, will impact on the prices of package holidays and therefore on the inflation rate. Inflation for food and other goods is likely to decline further over the next few months. However, price pressures in the services sector will probably ease more slowly, partly because wage growth remains strong.