Bundesbank: Recovery of the German Economy is Difficult

The German economy is struggling to recover from the crises of the past three years, warned the central bank, forecasting a slight decline in activity this year and lowering the growth estimate for 2024 due to higher interest rates and reduced competitiveness.

– The German economy will find it difficult to recover from the crises of the previous three years. It is still feeling the effects of high inflation, although at least that pressure is easing,” the central bank stated in its report.

They expect that economic activity this year will decrease slightly, by 0.3 percent, less than they estimated in December, thanks to lower energy prices.

In 2024, the economy is expected to grow by 1.2 percent and by 1.3 percent in 2025.

– Growth in 2024 and 2025 will be weaker than previously expected six months ago due to higher interest rates and reduced competitiveness – the report states, weaker than they forecasted in December.

Inflation measured by the Harmonized Index of Consumer Prices (HICP), which is used for comparisons among EU member states, is expected to be 6.0 percent this year and significantly lower than previously forecasted in December. The estimate for 2024 has also been notably lowered to 3.1 percent.

– Decisive monetary policy measures are important for curbing economic and social risks of prolonged inflation – said Bundesbank President Joachim Nagel.

The Bundesbank advocates a strict monetary policy, despite the deep crisis in the German industry.

Although energy prices have fallen in the meantime, core inflation remains high, emphasized the German governor, referring to the inflation rate that excludes food and energy prices.

High inflation could become entrenched if wages and profits continue to rise even more strongly, he warned.

The European Central Bank warned on Thursday that corporate profits and higher wages, partly due to one-off supports, are becoming an increasingly important source of inflation in the eurozone, alongside the effects of rising energy prices in the previous period and increased demand after the pandemic, especially in the services sector.