Germany Economic Forecast

After entering recession in Q1, the economy stagnated in Q2: Private and government spending strengthened, but investment activity moderated and exports contracted, likely due to recent interest rate hikes and a slow Chinese economy, respectively. Turning to Q3, our panelists expect the economy to accelerate slightly as private spending picks up and exports rebound. That said, recent data has been downbeat, suggesting that the economy could contract again. Business conditions in the manufacturing and services sectors worsened in July–August, according to the PMI, and exports to non-EU countries dipped in July. Recent measures by the government are unlikely to significantly affect output in the short term. These include easing citizenship rules to boost labor supply, EUR 20 billion in support for local semiconductor production and EUR 6.5 billion in corporate tax relief.

Harmonized inflation fell slightly more than expected in July, to 6.5% from 6.8% in June. Inflation excluding energy and food also declined, suggesting weak domestic demand is cooling price pressures. Inflation should continue to ease through the end of the year as consumer spending remains tepid and the base effect toughens.