Link Securities | According to the German central bank, the Bundesbank, in its monthly bulletin, and reported yesterday by Europa Press, the German economy will probably enter recession in 1Q2023 as the evolution of GDP will be weaker than in 4Q2022, when activity contracted by 0.2%. The Bundesbank also says it is confident that this contraction in economic activity will be milder than it expected in its December projections. According to the Bundesbank, gas shortages are no longer expected, while electricity and gas price caps are reducing costs for households and businesses, which has substantially eased the strain on energy markets. This, in turn, should benefit investment and production. However, it warns that the inflation rate remains high and both production and exports have started the year from very low levels.
That is why, in its bulletin, the institution assures that things could recover slowly as the year progresses, a year for which a significant improvement is not yet in sight, warning that German economic output is likely to decline slightly on average in 2023.
On price developments, the Bundesbank describes the moderation in the year-on-year rate of increase in the CPI in January to 9.2% from 9.6% in December as a surprise and says it expects the inflation rate to fall markedly in the coming months, while the underlying figure is likely to decline slowly from the current elevated levels. It also notes that, while negotiated wages continued to rise moderately in autumn 2022 as agreements prior to the period of high inflation predominated, more recent proposals were significantly higher. In this respect, it notes that the effects of high rates of price increases are already clearly visible in the most recent wage settlements, implying a risk of significant second-round effects on price developments, prolonging the time during which inflation remains well above the medium-term objective of 2% in the eurozone.
Finally, as regards the German labour market, the Bundesbank stresses that experts’ expectations were exceeded in December, while the outlook has improved in recent months, and in the short term companies will maintain their plans to hire more staff.
Assessment: although the Bundesbank seems to be clearly betting on the German economy entering recession in 1Q2023, after two consecutive quarters of GDP contraction, it also seems to expect that this will be short and shallow, as companies will, it expects, continue to expand their workforces.
What seems to worry the Bundesbank most are the second-round effects that could be caused by the sharp wage hikes that are being agreed upon in recent months, something that could make the fight against inflation more protracted.
Nothing in the Bundesbank’s statement should come as a surprise to investors, who until a few months ago were counting on a deep recession in Germany over the winter.