Germany is likely to be in recession now because of weak external demand, reduced consumption and domestic investment held back by high borrowing costs, the Bundesbank said in a monthly report on Monday on Europe's largest economy.
Germany has been trying to recover since the war between Ukraine and Russia in 2022 which increased energy costs. At the same time the industrial economy is now experiencing its fourth consecutive period of zero or negative growth, adding to the burden on the entire European zone.
"There is no recovery yet for the German economy," the Bundesbank said. "Output could fall slightly further in the first quarter of 2024. With a second consecutive decline in economic output, the German economy will be in a technical recession."
This poor performance has raised questions about the applicability of Germany's economic model and critics argue that many heavy industries that depend on energy are now unable to compete on international markets.
According to the Bundesbank, the German economy is currently weak. Overseas industrial demand is declining and the order backlog is decreasing.
Companies are also holding back on investment, in part because funding costs have risen sharply since the European Central Bank raised interest rates to record highs to fight inflation, the central bank said.
High nominal wage growth also impacted companies in key sectors, such as transport, which could indirectly impact growth in the quarter.
Shipping disruptions in the Red Sea, however, will not have a significant impact because there is plenty of capacity in shipping and transportation costs are only a small part of the overall cost of goods, the Bundesbank said.
Despite the weak outlook, the bank said it does not expect a major downturn in the labor market, which has so far protected the economy, and that Germany is not facing a sustained general recession.
"The weak phase in the German economy that has been going on since the beginning of Russia's riotous war against Ukraine will continue," the bank added.
