© Reuters. Spectators observe the sunrise casting light on Berlin’s skyline, showcasing the Fernsehturm (Television Tower) and the Berliner Funkturm (Berlin Radio Tower), Germany, September 7, 2023. REUTERS/Fabrizio Bensch/File Photo
FRANKFURT (Reuters) – The Bundesbank indicated in its regular monthly report released on Monday that Germany is on the verge of a recession due to weak external demand, cautious consumer behavior, and constrained domestic investments owing to high borrowing costs in the largest economy in Europe.
Since the 2022 Ukraine conflict escalated with Russia’s invasion, Germany has been grappling with escalating energy expenses, leading to the country’s vast industrial-centric economy experiencing zero or negative growth for the fourth consecutive quarter, exerting pressure on the entire eurozone.
“The German economy is still not showing signs of recovery,” stated the Bundesbank. “There is a possibility of a slight decline in output in the first quarter of 2024. A second consecutive output decline would push the German economy into a technical recession.”
The current feeble performance has stirred doubts about the sustainability of the German economic model, with some critics contending that the energy-intensive heavy industry may be losing competitiveness in global markets, signaling the need for an economic makeover.
Nevertheless, the government has countered pessimistic forecasts, asserting that the current predicament is a temporary confluence of high energy costs, subdued Chinese demand, and rapid inflation, which do not fundamentally question the economic strategy.
The Bundesbank anticipates the persistent weakness in the economy for the foreseeable future.
There is a downward trend in foreign industrial demand, coupled with a decrease in order backlogs.
Companies are hesitant to invest, partly due to the substantial surge in financing costs following the European Central Bank’s decision to raise interest rates to combat inflation, as per the central bank’s report.
Significant nominal wage growth is also impacting businesses, and potential strikes in critical sectors such as transportation could hinder growth in the upcoming quarter.
Despite disruptions in shipping in the Red Sea, the Bundesbank predicts that this will not have a substantial impact since there is ample shipping capacity, and freight costs make up only a small portion of the overall goods cost.
Although the economic outlook appears bleak, the bank foresees no significant deterioration in the labor market, which has shielded the economy thus far, and Germany is not confronting an extensive and prolonged recession.
“The lackluster phase in the German economy stemming from the onset of the Russian war of aggression against Ukraine is set to persist,” added the bank.