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The German economy, the largest in Europe, is on the verge of a Technical recession. The Bundesbank, Germany's central bank, has indicated in its most recent monthly report that the economy is expected to contract further in the first three months of this year. This forecast is based on a variety of factors, including government policies, strikes in the transportation industry, and weak consumer and industrial demand. At the beginning of this year, we wrote an article in which the challenges of the German and Dutch economies were discussed.
The Bundesbank notes that 'stressors are likely to persist in the first quarter', meaning that 'economic output could therefore decline slightly again'. Germany's economy contracted by 0.3 percent in both the fourth quarter and for the full year 2023, making it the worst-performing major economy in the world last year.
With a second consecutive decline in economic output, the central bank warns that the German economy could enter a technical recession. The government has already revised its growth forecast for this year from 1.3 percent to 0.2 percent, and for next year from 1.5 percent to 1 percent.
A key challenge is the €60 billion gap in public spending caused by a ban by the Constitutional Court on the use of off-budget financing vehicles to circumvent the country's debt brake. In addition, there are concerns about fiscal policy and the uncertainty surrounding transformation and climate policy, which weigh on confidence.
Strikes at trains and airports could hit production in the first quarter, while order books for manufacturing and construction are "declining". Demand for German industrial goods has "fallen significantly recently", while consumers are likely to remain cautious about their spending and higher borrowing costs are "likely to continue to weigh on investment".
Despite these challenges, the Bundesbank does not expect "a recession in the sense of a significant, broad-based and prolonged decline in economic output", especially as household expenditure "is likely to continue to improve against the backdrop of a stable labour market, sharply rising wages and falling inflation".
Economists expect the German economy to recover slowly this year, helped by recent declines in gas prices, lower inflation and continued strong wage growth. The painful inventory correction facing German companies is expected to ease by Easter, with consumer spending recovering from the spring.
In the Netherlands, the industrial sector also shrinking, especially in the chemical industry, which is suffering from high energy prices and falling output prices. Despite a decrease in the number of bankruptcies, the figures from the CBS continued deterioration in profitability in the industry.
The challenges facing the German and Dutch economies highlight the complexity of the current economic conditions in Europe. Both countries are looking for avenues to promote recovery, while navigating the uncertainties of government policies, global demand, and domestic production issues.
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