German Economy Outlook

FRANKFURT (Reuters) – The German economy may contract again this quarter due to a deep industrial recession, low investment, and cautious consumers, according to the Bundesbank’s monthly report released on Thursday.

The largest economy in the euro zone has experienced negative growth in two of the past three quarters, impacting the wider region as its extensive industrial sector grapples with weak export demand and high energy prices.

The economy will stagnate or decline again in the third quarter. However, a significant, long-lasting economic recession is not currently expected, stated the central bank.

Private consumption is expected to remain low for now, which presents a puzzle for some economists because real wages are increasing, and households have substantial savings. Despite the purchasing power increase, the Bundesbank predicts that consumers will continue to limit spending.

The outlook for industrial production is also anticipated to weaken in this quarter, with production plans and export projections deteriorating, although there are some early signs of recovery in new international orders.

The labor market, however, will likely help stabilize the economy, with overall employment remaining high, wages increasing, and a stable outlook for jobs. Yet, the Bundesbank indicated some worrying trends in the labor market, as the lack of economic recovery dampens employment plans in certain sectors. In manufacturing, larger layoffs have been averted by utilizing a social insurance program that allows firms to reduce working hours instead of resorting to layoffs.