(Bloomberg) -- Germany’s economy may end the year in stagnation after a shallow recession in the six months through September, according to the Bundesbank.
Output probably fell “slightly” in the third quarter, after a 0.1% drop in the second, the central bank said Thursday in its monthly report. Gross domestic product should then stay broadly stable in final three months, it said, again dismissing the chance of a deep downturn.
“Even though a recession in the sense of a significant, broad-based and prolonged decline in economic output is still not expected for the German economy at present, it’s stuck in the phase of weakness that’s persisted since mid-2022,” the report said.
Europe’s biggest economy is battling a lengthy retreat in its important manufacturing sector, which has raised concerns about the country’s competitiveness and its longer-term growth prospects. High borrowing costs and political uncertainty are contributing to weak demand in industry and construction, according to the Bundesbank.
Business surveys by S&P Global earlier Thursday showed that the downturn in private-sector activity eased in October, with services continuing to grow. Concerns remain about household consumption, however, which hasn’t recovered as much as predicted.
“Although the increase in their real income is intact, as wages are rising significantly faster than prices, they’re still hesitant to take advantage of this additional spending leeway,” the Bundesbank said.
In a separate article in the report, it highlighted that pay demands remain elevated considering the rapid retreat in inflation, and that salary increases could well outpace those of other euro-area nations in the coming quarters. Especially in the services sector, that may be due to staff shortages, it said.
“These findings don’t fundamentally question the expected process of disinflation in Germany,” according to the Bundesbank. “However, further labor-market developments in Germany play an important role for the pace and extent of disinflation, in addition to productivity developments and profit margins.”
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