German economy to shrink in Q1

Germany’s economy is projected to contract once again in Q1 of 2023, according to a monthly report by the Bundesbank. Although the decline is expected to be less than in the final quarter of 2022, the country’s economy remains at risk of a recession as it grapples with the impact of the Covid-19 pandemic, supply chain issues and high inflation. While the labour market is currently showing positive developments for employment, the country’s vast industrial sector is only just starting to recover.

The European Central Bank (ECB) has raised interest rates by 350 basis points since July 2022, but inflation remains stubbornly high. The ECB aims to tackle runaway inflation, but the bank’s efforts may not be enough to keep price growth below its 2% target through 2025. The underlying inflation is likely to be persistent even if overall inflation falls, which is expected to happen in Germany in March. High energy prices of the past year have seeped into other costs and wages, contributing to the rise in core inflation.

The Bundesbank report indicates that although Germany’s economy is struggling, the labour market is showing resilience. However, the high inflation rate is weighing heavily on consumption, and the country’s economic situation remains fragile. The government and the central bank must continue to monitor the situation closely and take appropriate measures to stabilise the economy.

To address the underlying inflation, the ECB will need to maintain its tightening monetary policy. Although the bank’s efforts so far have not produced the desired results, continuing its current path may help bring the situation under control in the medium to long term. However, it may take time for the effects of the bank’s actions to be felt, and the Bundesbank suggests that a more comprehensive package of reforms may be necessary to stabilise the German economy in the long run.

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