Germany’s Economy to Contract, Entering Recession

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Germany’s economy is expected to contract again in the current quarter, solidifying a recession in Europe’s largest economy, according to a fresh government forecast published on Wednesday. The German economy already experienced a 0.1% decline in the third quarter, and current indicators suggest another slight decrease in gross domestic product in the final three months, as per the monthly report by the economy ministry.

Challenges and Outlook

The report highlights that fiscal complications arising from Germany’s constitutional court ruling, which reduced public spending by around 60 billion euros ($64.77 billion), have weighed on the economic outlook. Nonetheless, Chancellor Olaf Scholz’s government managed to agree on a 2024 budget, putting an end to weeks of turmoil that threatened to impact the ruling coalition.

While growth is expected to return in 2024, sentiment indicators for both companies and households suggest a slightly more positive outlook. However, risks to any economic recovery persist due to the weak global economy, ongoing geopolitical crises, and associated spikes in commodity prices, according to the ministry.

Impact on Investment and Consumption

The ministry predicts that even positive trends in investment will noticeably weaken, but household consumption should stabilize due to rising real wages and cooling inflation.

Economic Forecasts

The German government previously projected a 0.4% decline in German GDP for 2023 as a whole before rebounding with 1.3% growth next year. Economists polled by FactSet anticipate a 0.2% decline in the German economy in the fourth quarter of this year.

Meanwhile, the European Central Bank will release new economic forecasts for the bloc during its monetary policy meeting on Thursday.

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