German economy to contract further in Q1: Bundesbank

Germany’s economy is likely to contract further in the first quarter (Q1) of 2023 due to persistent high inflation, the country’s central bank said in its monthly report on Monday.

“However, the decline is expected to be smaller than in the final quarter of 2022,” said Deutsche Bundesbank.

In the period from October to December last year, gross domestic product (GDP) of Europe’s largest economy fell by 0.4 percent.

The inconsistent recovery of exports was one of the reasons for the decline. “In addition, the consumer-related sectors of the economy continue to suffer from persistent high inflation and the resulting consumer restraint,” according to the report.

Retail sales in Germany continued to fall at the start of this year. According to the Federal Statistical Office (Destatis), currency adjusted sales in January were 0.3 percent lower than in December last year.

Inflation in Germany stabilized at a “high level” of 8.7 percent in February, according to Destatis. At 21.8 percent year-on-year, prices for food rose particularly sharply, replacing energy as the main inflation driver.

In March, Deutsche Bundesbank expects inflation in the country to “decline significantly” due to a “base effect” from the high reference price level a year ago. By the middle of the year, however, the inflation rate could rise again.

Due to high inflation, Germany is struggling as a business location. Many German companies are planning to relocate production to the United States, where energy costs are lower and companies receive high subsidies for environmentally friendly technologies through the Inflation Reduction Act (IRA).

According to a recent survey conducted by the German American Chamber of Commerce, 93 percent companies in Germany intend to increase their U.S. investments in the next three years. One in five are even planning investment volumes of more than 10 million U.S. dollars.

European Investment Bank (EIB) President Werner Hoyer warned that the IRA is a “wake-up call that we should hear.” Many companies in the bloc “are under intense pressure to move their production and in particular their development departments to the U.S.,” he said earlier this month. ■

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