Economics Update May 2023 - German economy: double dip increasingly likely

Germany's economy has come through the winter better than originally expected, but a self-sustaining upturn is not in sight for the time being. There are a number of reasons why it is more likely that there will be a renewed economic downturn after a brief interim recovery.

Government price brakes fizzle out

The price caps for electricity and gas are only effective in the short term. In the long term, they cannot prevent massive losses of purchasing power. Energy prices - especially for natural gas - are expected to rise again in the course of the year because Germany will have to purchase additional gas on the world market to compensate for previous supplies from Russia, while global supply will remain stable. Private households are increasingly unable to absorb rising energy costs from existing reserves, as the savings rate has already fallen below the long-term average and German households' demand deposits with banks are also noticeably below the level seen before the start of the Corona pandemic. Against this background, private consumption is expected to remain weak.

Restrictive monetary policy taking effect

The ECB's tightening of monetary policy is now also having a visible impact on lending: Stagnation in corporate lending and slowing growth in mortgage lending have led to a fall in investment activity overall. Construction investment has already been declining since the middle of 2022. It is to be feared that the downward trend will accelerate here: In addition to higher interest rates, significantly increased construction costs are leading to many construction projects being put on hold and new ones not even being started. The result will be a noticeable slump in construction output.

Hardly any impetus from China

The industry is benefiting from high order backlogs and is able to work through them in the face of significantly reduced supply disruptions. However, considerable uncertainties remain, particularly in the energy-intensive industries, which must fear for their global competitiveness. China is also likely to fail to provide impetus for German industry because the bulk of the Chinese economic recovery will take place at home, where it will benefit service sectors in particular. A boom in exports to China is therefore not to be expected.

Taken together, these factors mean that the momentum of overall economic development in the coming quarters is likely to be positive, but overall only slightly above the zero line. Overall economic output at the end of 2023 is still likely to be at the level of the third quarter of 2022.

US recession as an additional burden

A further deterioration would result from a recession in the US economy, which is already becoming apparent in the second half of the year as a result of the restrictive monetary policy of the US Federal Reserve. The USA remains Germany's largest trading partner. If a US recession hits an already struggling German economy, there is a risk of a relapse into negative economic development at the turn of 2023/24 - a classic double-dip development. Only in the course of 2024 could growth pick up noticeably. For 2024 as a whole, GDP growth is therefore expected to be very weak again, at around 0.4 percent.