German Central Bank Forecasts Stagnant Growth Amid Weak Demand and Rising Financing Costs

The German Central Bank (Bundesbank) has projected that the country’s economy is likely to experience flat growth in the third quarter due to weak foreign demand and increasing financing costs. The bank’s August economic report indicated that early estimates pointed to zero growth in the German economy for the second quarter of the year, and the outlook for the July-September period was not significantly better. The Bundesbank highlighted that external factors like weak demand from abroad and rising financing costs were placing pressure on the economy, leading to the expectation that Germany’s economic output would remain largely unchanged in the third quarter.

The German Central Bank (Bundesbank) has released its economic report for August, outlining its perspective on the country’s economic performance. According to the report, the Bundesbank anticipates that the German economy will likely experience stagnant growth in the third quarter due to a combination of factors including weak foreign demand and rising financing costs.

Early estimates from the report suggest that the German economy registered zero growth in the second quarter of the year, pointing to a lackluster performance. Moreover, the outlook for the July-September period does not indicate significant improvement.

The Bundesbank emphasized that the German economy is facing challenges from weak demand originating from abroad, as well as the impact of increasing financing costs driven by interest rate hikes. The report stated, “Germany’s economic output will probably remain largely unchanged in the third quarter.”

The decline in external demand for German goods has resulted in a recent downward trend in industrial production. The report forecasts that industrial output will likely continue to be weak during the July-September period.

Additionally, the report acknowledged that China, Germany’s largest trading partner, is experiencing a slowdown in its recovery after the COVID-19 pandemic. The European Central Bank’s (ECB) efforts to reduce inflation through interest rate increases and the consequent rise in borrowing costs are also expected to exert pressure on investment and the construction sector in Germany.

The Bundesbank’s report suggested that due to the slow easing of price pressures, inflation could remain above the ECB’s target of 2 percent for an extended period.

The German economy faced a contraction of 0.3 percent in the first quarter of the year due to the impact of unusually high inflation and rising interest rates affecting consumer spending. This technically placed the economy in a recession. The economy had contracted by 0.5 percent in the final quarter of the previous year.

While the challenges that emerged during the COVID-19 pandemic have eased to some extent, factors such as rising interest rates, reduced economic confidence, and the impact of higher-than-usual inflation on purchasing power have led to sluggish demand, negatively affecting the German economy.

The German government had initially anticipated 0.4 percent growth for the year, while leading economic think tanks in Germany are predicting a contraction of 0.2 to 0.4 percent in 2023.

Meanwhile, the German Federal Statistical Office (Destatis) is scheduled to release preliminary GDP data for the second quarter on August 25th.