German Market Intelligence
This section is produced in co-operation with Germany Trade & Invest and features economic reports and sector overviews
Federal Ministry for Economic Affairs and Climate Action (BMWK)
- The German economy is only emerging slowly from the setbacks caused by the energy price shock, the tighter monetary policy and the global economic softening. This is delaying the generally expected economic recovery. The third quarter is expected to see another slight fall in gross domestic product.
- Industrial output rose slightly between July and August (+0.5%), although both the construction sector (-2.4%) and the energy sector (-6.6%) registered significant declines. The order reserves in the manufacturing sector expanded by 3.9%. The renewed rise in demand and a cautious stabilisation of some indicators of sentiment suggest that industrial output is bottoming out and could pick up speed again at the turn of the year.
- Real retail turnover (excluding cars) dropped by 1.2% between July and August, but at the same time the new registrations of cars by private individuals rose clearly, by 12.1%. Overall, the retail turnover including cars – an important component of consumer spending – was probably up in real terms.
- The rate of inflation fell substantially to 4.5% in September, mainly due to a base effect resulting from the end in September 2022 of the 9-euro public transport ticket and of the tax cut for motor fuel. In view of the declining price pressures at the upstream levels of the economy, the coming months are expected to see a further slow fall-off in inflation.
- The cyclical weakness has meant that the autumn uptick on the labour market has been small. Seasonally adjusted unemployment rose by 10,000 people in September. The leading indicators of the Institute for Labour Market Research and ifo deteriorated significantly. The labour market is not expected to see a recovery until the economy picks up speed in the coming spring.
- Indicators of sentiment (business expectations, purchasing managers index) suggest that the Germany economy could have bottomed out in the third quarter, and will likely pick up speed again around the turn of the year.
- The latest figures are indicative of a two-pronged economic development. While the domestic economy has slowly picked up as a result of the slight rise in real wages and a continued positive trend in investment activity, foreign demand continues to slow down due to the weakness of the global economy.
- Industry again saw a significant drop in output of 1.8%, whereas output in the construction sector increased by 2.6%. After stabilising in the previous month, the particularly energy-intensive industrial sectors again recorded a decline of 0.6%. Following a strong increase in June (+7.6%), new industrial orders were down sharply in July (-11.7%). However, the decline is primarily attributable to one-off special factors resulting from large-scale orders dating from the previous month. Excluding large-scale orders, orders grew by 0.3%.
- Real retail sales excluding motor vehicles declined slightly again in July (-0.8%). The less volatile three-month comparison, however, still showed an increase of 1.8%. The leading indicators currently still point to restrained growth of consumer spending in the coming months.
- Consumer price inflation continued its downward trend in August. The inflation rate was 6.1% (July: +6.2%), while core inflation remained at 5.5%. Food prices again rose at a disproportionately high rate (+9.0%) compared with the same month a year ago, although upward pressure on prices continued to ease (July: +11.0%).
- The cyclical weakness of the economy is also increasingly affecting the labour market. Unemployment rose noticeably by 18,000 persons in August on a seasonally adjusted basis. The sluggish development of the leading indicators from the Institute for Labour Market Research (IAB) and ifo in August continue to suggest slowing momentum in the labour market. Overall, however, the labour market remains largely stable despite the current economic weakness.
- Current leading indicators, such as order activity and business climate, and also the subdued development of the global economy point to continued weakness in the third quarter; a noticeable economic recovery is not expected until the turn of the year 2023/24 at the earliest.
- The economic situation in the early summer continues to be characterised by a high level of uncertainty and by data pointing in different directions. Whilst the external economic environment has remained weak, some domestic economic indicators are now pointing towards a stabilisation. Overall, the economic development in the second quarter is likely to have been very restrained.
- The latest data on the economic indicators, particularly on new orders and industrial output, point to a moderate underlying economic performance following a significant cooling towards the end of the first quarter. Although business sentiment has worsened, the current stabilisation of demand is suggestive of a gradual recovery of the industrial economy in the coming months.
- Retail sales (excluding motor vehicles) improved slightly in May compared with the previous month, for the second time in succession. However, consumers continue to be uncertain. Over the coming months, consumer spending is not expected to trigger significant growth in real terms.
- The upward trend in consumer prices picked up some speed again in June, with the inflation rate standing at 6.4% (May: +6.1%). The core inflation rate also rose by 0.4 percentage points to 5.8%. However, following the declining trend since March, this is mainly due to one-off effects relating to the relief provided by the state a year ago (9-euro monthly public transport ticket, reduction in motor fuel duty).
- Whilst the labour market appeared to be unaffected by the difficult cyclical situation for a long time, the situation worsened appreciably in June in the wake of the weaker economic performance. Registered unemployment continued to rise, and employment declined. In view of the ongoing skills shortage, however, no sharp rise in unemployment is likely.
- In April 2023, the number of insolvencies was 14.4% up in year-on-year terms according to official statistics. Current leading indicators are showing a sharp year-on-year rise for June (Halle Institute for Economic Research: 48.1%). According to the institute’s Bankruptcy Update, the number of insolvencies of partnerships and corporations has risen to the highest level since 2016. However, the coming months are expected to see a slight fall. Overall, the trend shows a continuous rise since mid-2022, albeit from a very low level.
- Generally, falling prices on the global energy markets, slowing inflation, higher wage agreements and the expected global economic recovery all point to a moderate recovery of the German economy in the rest of the year.
- After two consecutive quarters of negative growth in the winter half-year 2022/23, current economic indicators suggest a sluggish start to the second quarter. According to the common definition, it can be said that the German economy was in a "technical recession". The higher energy prices, the weak global economy and less favourable financing conditions are still impacting the economy and delaying the expected economic recovery.
- The underlying cyclical dynamism of the economy has weakened. Industrial output remained virtually unchanged in April after falling sharply by -2.0 per cent in March. New orders fell slightly in April (-0.4 per cent), following a sharp drop in the previous month (-10.9 per cent).
- Following a noticeable decline in retail sales (excluding motor vehicles) in March, retail trade recovered somewhat in April. Consumer sentiment continued to brighten, but only slightly. Overall, consumer sentiment was still at a very low level because high inflation continues to weigh on household spending.
- The upward trend in consumer prices weakened further in May, with the inflation rate standing at 6.1 per cent. The rate of core inflation also declined slightly to 5.4 per cent. It is expected that there will be base effects in the further course of the year as a result of the relief measures taken a year ago to curb price increases. These are likely to temporarily reinforce upward pressure on prices.
- On the labour market, the economic slowdown led to a loss of momentum in the winter half-year. Registered unemployment continued to rise slightly.
- Looking ahead, falling prices on the global energy markets, slowing inflation, higher wage agreements and the expected global economic recovery all point to a moderate recovery of the German economy in the remaining course of the year.
- The underlying cyclical dynamism has recently weakened noticeably: the latest key indicators show substantial declines, only some of which are likely to have been a reaction to previous increases.
- After two months of positive development, industrial output fell back again in March. In March, new manufacturing orders registered their sharpest decline since the peak of the Covid-19 pandemic in April 2020. Business sentiment, however, brightened for the sixth month in succession.
- Retail turnover (excluding vehicles) fell again in March. Consumer sentiment is expected to continue to recover in the coming months, even though the persisting high rate of inflation remains an issue.
- The rate of inflation dropped to +7.2% in April. The main reason for this slight decline (March: +7.4%) was the diminishing of price pressures on foodstuffs, which were nonetheless much higher than they were a year before.
- The spring recovery of the labour market remains restrained for the time being. Registered unemployment rose somewhat in April in seasonally adjusted terms, though the Easter holidays also played a role here. According to the IAB Job Vacancy Survey, the demand for labour declined somewhat in the first quarter, but still remains at a high level. Gainful employment increased strongly in the first quarter.
- According to the official statistics, the figures for corporate insolvencies in January and February 2023 were around 20% higher than the respective monthly levels for the previous year. Current leading indicators point to a similar trend over the coming months, but currently, the situation is not expected to worsen.
- The current major fluctuations, susceptibility to revisions and the partially contradictory indicator data are not unusual for economic turning points. Following a slow winter season, indicators of sentiment suggest economic recovery over the course of the year.
- Current economic indicators point to a noticeable upturn in value added in the first quarter of 2023: output in the industrial and building sectors showed a clear upward trend as a result of the further easing of shortages of materials, the significant decline in energy prices and favourable weather conditions.
- Overall, GDP is likely to have risen slightly compared with the previous quarter, thus avoiding a ‘technical recession’. Current forecasts by the German Council of Economic Experts and the joint diagnosis of economic research institutes also predict slightly positive GDP growth for the year as a whole.
- The industrial sector was on the path towards recovery in the first quarter. Both production in the manufacturing sector and new manufacturing orders increased significantly in January and February. The business outlook brightened and fewer companies reported shortages of materials.
- Retail sales (excluding motor vehicles) decreased again in February, after having fallen noticeably in December despite Christmas sales and having remained fairly steady in January. Consumer sentiment is expected to continue its recovery in the coming months, although inflation-related losses in purchasing power continue to weigh on the economy.
- The inflation rate declined to +7.4% in March. A base effect played a major role here. At present, food is the biggest price driver, not only because of its high weight in the basket of goods, but also because food inflation is now higher than that of energy prices.
- The labour market showed robust flat movement in the month of March. The typical spring upturn, however, was comparatively weak. Registered unemployment increased in March in seasonally adjusted terms, but employment also increased strongly. Demand for labour remains at a high level.
- By the end of 2022, the dynamic development of the German economy slowed noticeably. In the fourth quarter of 2022, GDP declined by 0.2% compared with the previous quarter. The annual figure was revised downward by one tenth to 1.8%. Consumer spending and investment in particular are likely to have developed more weakly in the fourth quarter. Industry continues to struggle with a high level of uncertainty and high energy prices.
- Current indicators support the expected economic slowdown in the winter half-year 2022/23, but suggest that it is likely to be rather limited. Nevertheless, the rise in prices which is putting an increasing burden on consumers, uncertainties about the economic outlook and rising interest rates weighed down on economic activity at the beginning of the year and caused a reluctance to invest.
- According to the ifo surveys, the mood in German business continued to brighten in January. Almost all sectors of the economy were more confident than before. This is a further indication that there will only be a slight recession in the winter.
- Industrial production experienced a setback at the end of the year. While the automotive sector expanded noticeably, output in other sectors such as mechanical engineering fell significantly. However, the downward trend in manufacturing orders seen since February of last year did not continue in December.
- Christmas sales in the retail sector were weak. Retail turnover fell significantly in December compared with the previous month. By contrast, the positive trend in consumer sentiment continued.
- At an expected +8.7%, the inflation rate in January remained clearly below the 10% threshold. The situation at the upstream sales levels has also eased in recent months as a result of falling energy prices.
- The labour market remains tight despite the decrease in economic activity. The increase in employment continued recently, and the number of unemployed fell on a seasonally adjusted basis. Leading indicators point to a rising willingness of companies to recruit staff and a further decline in unemployment.
- The high energy prices that are increasingly hitting consumers are a burden on economic development in Germany. In addition, a high degree of uncertainty about the economic outlook and rising interest rates are creating a reluctance to invest. Economic output is expected to decline slightly over the winter.
- However, there are increasing signs that the recession could be milder than previously expected. The ifo Business Climate rose in November for the second month in a row, albeit from a low level. The Federal Government’s decisions on the cap on gas and electricity prices certainly helped to stabilise expectations.
- Industry had a weak start to the fourth quarter and its outlook remains gloomy. Industrial production declined in October. Energy-intensive sectors in particular have again reduced their output, in some cases significantly. This is probably also due to the fact that certain energy-intensive products were increasingly being imported instead of being produced locally due to the sharp increase in prices.
- Retail sales declined again in October. However, the mood among private consumers has recently stabilised further, albeit at a still very low level.
- Inflation fell by 0.5% in November from the previous month, the first decline since November 2021. Compared to the previous year, it rose by 10.0%. The main reasons for the slight decline were lower prices for package tours and lower energy prices.
- The labour market situation remains stable, even though there are more and more signs of a slowdown. Companies are becoming more hesitant to hire new staff; advertisements for short-time work are increasing again slightly at a low level. In view of the labour shortages, companies are trying to retain their employees.
- In Q1 to Q3 of 2022, German local courts reported a total of 10,643 corporate insolvencies filed, roughly the same number as in the corresponding period in 2021. Current leading indicators and surveys point to a slight rise in insolvency cases over the coming months, but a “wave of insolvencies” is not in sight.
- The persistently high energy prices, rising inflation and the related losses of purchasing power are increasingly impacting economic development in Germany.
- According to the latest official figures, the third quarter was better than expected, and the German economy did grow. Going forward, however, the Federal Government expects economic output to decline in the 2022-23 winter half-year, meaning that annualised GDP growth will probably be slightly negative in 2023.
- Industry has successfully managed to cut back substantially on its gas consumption this year. A large proportion of these reductions is due to improved efficiency and to substitution with alternative energy sources. The main falls in industrial output were in the energy-intensive sectors. The gas reservoirs are more than 99% full (at the beginning of November).
- Industrial output increased again at the end of the third quarter. The outlook for the coming months is however dampened by a clear drop in demand and poor business sentiment.
- Retail turnover picked up again in September, even though sales at filling stations slumped following the end of the tax break on fuel. Consumer sentiment remains very down-hearted.
- The inflation rate rose further to 10.4% in October, the highest level since December 1951. This was despite the fact that the cut in VAT on gas deliveries and district heating from 19% to 7% must have reduced the rate.
- The labour market remained robust in October, but is showing signs of the less favourable economic outlook. In view of the shortages on the labour market, companies are trying to retain their employees.
- From January to August 2022, German district courts reported a total of 9,414 corporate insolvencies filed, roughly 2% fewer than in the same period in 2021. Current leading indicators and surveys are suggestive of rising insolvency cases, but a “wave of insolvencies” is not in sight.
- On 12 October, Federal Minister Habeck submitted the autumn projection to the Federal Government.
- Prospects for growth in Germany have significantly deteriorated. The reason for this is the breach of all gas supply agreements on the part of Russia, which has led to persistently high energy prices in Europe.
- The Federal Government still expects growth of 1.4% this year. In 2023, economic output is likely to decline by 0.4%.
- The rate of inflation will remain at a high level of 8% in 2022 and 7% in 2023. Without the measures of the economic shield, it would have been even higher.
- Cyclical indicators suggest that a difficult winter lies ahead for the German economy.
- Industry suffered another setback. In August, both production and new orders declined.
- Retail sales continued their downward trend in August. In view of sharp price increases, the consumer climate continued to point downwards.
- The rate of inflation increased to 10.0% in September, its highest level since December 1951. Contributing factors were the end of the reduction in the energy tax on motor fuels and of the nine-euro public transport ticket.
- The situation on the labour market remains stable. While the leading indicators have dropped, they do suggest that despite an impending recession, companies will retain their employees.
German local courts reported a total of 7,113 corporate insolvencies filed in the first half of 2022, 4% fewer than in the first half of 2021. Current leading indicators and surveys are suggestive of a turnaround in the number of, at present declining, insolvency cases, but a “wave of insolvencies” is not in sight.
German Central Bank (Deutsche Bundesbank)
Real gross domestic product (GDP) is likely to have contracted somewhat in the third quarter of 2023.1 Several factors dragged on the German economy, such as continued weak foreign demand for industrial products. Higher financing costs also dampened investment. This depressed domestic demand in the industrial sector and, above all, in construction. Only some of this was cushioned by the existing order backlog. Output in industry and the main construction sector therefore declined significantly in the third quarter. Tailwinds for the German economy came from the still robust labour market and steep wage increases amidst subsiding inflation. However, households were probably not yet using their additional scope for spending to increase their consumption. This is signalled by consumption indicators, such as weak real sales in retail and in the hotel and restaurant sector. Furthermore, surveys conducted by the market research institution GfK point to a high propensity to save. The weakness of industry and private consumption also weighed on many services sectors, as indicated by ifo Institute surveys and the S&P Global Purchasing Managers’ Index.
German economic output will probably contract somewhat in the third quarter of 2023. It is unlikely that private consumption will offer any discernible positive impetus. Households are still reluctant to spend despite the slight easing in price inflation, strong wage growth and favourable labour market. Alongside consumer restraint, economic output is also being depressed by the growing weakness in industry. The further fall in the already low level of new orders and weaker order books are having more and more of an impact on industrial output. Higher financing costs are also likely to be contributing to weak domestic and foreign demand.
German economy still lacklustre amid persistently high inflation
Global activity subdued
Global activity remained subdued in the second quarter. Private consumption in particular was slow to gain traction because although inflation eased, it was still strong in many places. At the same time, the tighter monetary policy stance in many regions is likely to have been an increasing drag on the global economy. In the euro area, this backdrop meant that it was only thanks to irregular effects that the economy was able to register perceptible growth. Economic activity in the United States, by contrast, remained in comparatively good shape. In China, meanwhile, the recovery set in motion by the end of the zero-COVID policy quickly lost momentum.
Recovery probably began in second quarter
German economic output is likely to have gone up slightly in the second quarter of 2023. Private consumption, having previously dropped sharply, appears to have stabilised. This was partly due to the fact that the labour market remained in good shape, wages rose sharply and price inflation did not continue to accelerate. The services sectors are also likely to have benefited from this. Furthermore, supply bottlenecks continued to ease. Together with the large backlog of orders, they prevented worse outcomes in industry and construction. Neither of these sectors was able to expand their output compared with the previous quarter. Declining foreign demand curbed industrial activity. Moreover, higher funding costs constrained domestic investment. They also continue to weigh considerably on demand for construction work. According to survey data provided by the ifo Institute, sentiment among businesses grew significantly gloomier in June. Industry, in particular, showed a distinct increase in pessimism. The economic recovery over the remainder of the year could therefore end up being somewhat more tentative than expected in the June projection.1
Lowest point may have been reached
According to revised data, the German economy continued to contract in the first quarter of 2023,1 which meant that it was in a technical recession in the past winter half-year.2 The decline in real gross domestic product (GDP) in the winter half-year was in line with the expectations expressed in the December 2022 projection.3 However, real gross value added (GVA) saw only a comparatively small decrease overall and even rose sharply in the first quarter.4 GDP is also expected to edge up again slightly in the current quarter, although some strains remain.5 External industrial demand continues to fall and is weighing on output and exports. Higher financing costs are dampening investment, pushing down domestic demand in a number of industrial sectors and in construction. However, supply bottlenecks continue to dwindle in importance and the still very high order backlog is providing support. In addition, despite inflation still being high, households are slowly experiencing more scope for spending again, as inflation is in fact easing and wages are rising steeply. Furthermore, employment is growing. Beneficiaries of this environment are private consumption and service providers, which are likely expanding significantly. Finally, government consumption is expected to pick up again, having fallen sharply in the first quarter due to pandemic-related expenditure petering out.
Activity stagnating and inflation still too high in Germany. Global economy makes solid start to 2023, outlook rather subdued.
The global economy got off to a solid start in 2023. Stimuli for growth came primarily from China, where real gross domestic product (GDP) rose significantly after the end of the country’s zero-COVID policy. At the same time, economic activity in the euro area picked up again, partly thanks to a distinct easing of the situation in energy markets. Fears of a recession have so far proven unfounded in the United States, too, with moderate economic growth continuing, driven by consumers’ readiness to spend.
Despite the solid start to the year, the global economic environment is likely to remain challenging. While the upturn in China is set to continue at a moderate pace, stubbornly high inflation and tighter monetary policy are putting the brakes on activity in almost all advanced economies. Added to this are risks stemming from the recent turmoil in the banking system, especially in the United States.
Economic output probably rose again in first quarter
The German economy beat last month’s expectations in the first quarter of 2023, probably increasing its activity again somewhat.1 While persistently high inflation weighed on private consumption and consumer-related service providers, industry saw a stronger recovery than expected. The return to lower energy prices provided direct support for energyintensive production, bottlenecks in the supply of intermediate goods continued to ease and demand picked up again markedly. Output also rose sharply in the main construction sector, although higher construction prices and financing costs continued to dampen demand for construction work considerably. Unlike in industry, it was mainly temporary factors that are likely to have contributed to this increase, especially the mild weather in January and February by normal standards, following December weather that had been unfavourable for construction activity.
The German economy recovered only slowly at the beginning of 2023 following the broadbased and strong setback in December of last year. Industry and construction saw another sharp increase in output in January, even exceeding the previous quarter’s average, but exports of goods rallied only partially in priceadjusted terms. Moreover, consumer-related sectors continue to suffer from the persistently high inflation and the associated reluctance on the part of consumers. In the retail sector, sales remained at the depressed level of the previous month in price-adjusted terms and were thus significantly below the previous quarter’s average. Although the GfK consumer climate recovered slightly of late, it stayed at a very low level. According to the ifo surveys, the same applies to enterprises’ business expectations, which are still mostly pessimistic despite brightening further in February. The assessment of the business situation even deteriorated somewhat. All in all, German economic activity is likely to fall again in the current quarter. However, the decline is likely to be smaller than in the final quarter of 2022 in which economic output fell by 0.4%, according to revised data published by the Federal Statistical Office.
Global economy growing moderately amidst improving sentiment
The global economy continued to see only moderate growth in the final quarter of 2022 owing to various headwinds. The main factors behind this slowdown were high inflation rates, the continued tightening of monetary policy in many industrial countries and the European energy crisis triggered by Russia’s war on Ukraine. Accordingly, there was weak economic momentum in the euro area, although it was somewhat stronger than had been expected just a few weeks ago. In the United States, gross domestic product (GDP) rose markedly in the fourth quarter, but the underlying economic momentum also remained subdued. In China, economic growth was initially halted by fresh lockdowns and then by a massive wave of infections after all of the containment measures were suddenly lifted. At the turn of the year, sentiment amongst entrepreneurs and consumers worldwide brightened slightly, with recessionary fears receding somewhat. This is likely to have been helped by the distinct easing of the European energy crisis. Inflationary pressures also relented somewhat. Finally, the end of the zero-COVID policy in China is likely to pave the way for economic recovery.
In the final quarter of 2022, real gross domestic product (GDP) is likely to have more or less stagnated, and thus exceeded previous expectations.1 Overall, the latest data releases were better than had been assumed in the December projection.2 High inflation and uncertainty surrounding the war in Ukraine weighed on the economy in the fourth quarter, but the situation in the energy markets eased markedly compared with the third quarter. In addition, further fiscal measures were taken which will alleviate some of the pressure households and enterprises are facing due to high energy costs. Moreover, supply bottlenecks in industry and construction became less of an issue. As a result, the business climate brightened over the course of the quarter, according to surveys by the ifo Institute. Output in both industry and construction increased based on data available up to November. However, high inflation dampened households’ propensity to spend. On an average of October and November, priceadjusted sales in both the retail and the accommodation and food service sectors fell significantly compared with the third quarter. Car purchases provided positive impetus, by contrast, with motor vehicle registrations increasing extremely robustly in the fourth quarter according to data from the German Association of the Automotive Industry (VDA). This was partly due to advance purchases, as government subsidies for plug-in hybrids were scrapped at the end of 2022 and were reduced for electric vehicles.
Economic data for the German economy sent mixed signals at the start of the fourth quarter of 2022. On an average of October and November, enterprises were significantly less satisfied with their business situation than in the third quarter, according to the ifo Institute. Output figures for October brought a positive surprise, however. This is particularly true of the main construction sector, which recorded a marked increase despite sharply declining new orders. Industry kept its output at roughly the same level as in the third quarter, although energy-intensive sectors continued to contract significantly. By contrast, retail sales continued their steep decline – both in nominal and in real terms. Consumers showed a marked hesitance to buy, with high inflation diminishing their purchasing power and concerns about high energy costs dampening their propensity to spend. In November, the consumer climate index compiled by the market research institute GfK departed only slightly from its record low in October. Enterprises’ business expectations as surveyed by the ifo Institute also improved somewhat in November, but were still very pessimistic. Economic output in Germany is likely to decline in the fourth quarter on the whole, although probably somewhat less sharply than previously expected.
Global activity continues to deteriorate
Global economic activity continued to deteriorate in the third quarter of 2022. Sustained strong price pressures weighed on private consumption in particular. The tightening of monetary policy being pursued in many places also left its first marks. In Europe, exceptionally high energy prices and uncertainty about the future supply of energy were additional drags on economic activity. Growth in gross domestic product (GDP) therefore weakened markedly in the euro area. In Japan and the United Kingdom, economic output even declined somewhat. The steep growth in China was primarily due to the easing of pandemic-related restrictions. GDP in the United States also increased significantly, following a decline in the first half of the year. In both economies, though, the underlying cyclical trend remained subdued.
Persistent high inflation and uncertainty about energy supply and its costs are weighing heavily on the German economy. According to surveys by the ifo Institute, business sentiment deteriorated strongly in all sectors in September. The consumer climate index calculated by the market research institute GfK fell to a new record low. The economy is probably on the brink of a recession.
conomic output may have remained more or less unchanged in the third quarter of 2022. According to data available up to August, industry and construction increased their output somewhat. Furthermore, the elimination of most coronavirus protective measures probably still provided positive stimuli in some services sectors. By contrast, price-adjusted sales declined somewhat in the retail sector. In addition, economic output is likely to have fallen over the course of the quarter, as indicated by the ifo Institute’s surveys on the business situation of enterprises. There are mounting signs of a slowdown in construction as well.
European Central Bank (ECB)
The Governing Council decided at its meeting on 26 October 2023 to keep the three key ECB interest rates unchanged. The incoming information has broadly confirmed its previous assessment of the medium-term inflation outlook. Inflation is still expected to stay too high for too long, and domestic price pressures remain strong. At the same time, inflation dropped markedly in September, including due to strong base effects, and most measures of underlying inflation have continued to ease. The Governing Council’s past interest rate increases continue to be transmitted forcefully into financing conditions. This is increasingly dampening demand and thereby helps push down inflation.
The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.
Inflation continues to decline but is still expected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. In order to reinforce progress towards its target, the Governing Council decided at its meeting on 14 September 2023 to raise the three key ECB interest rates by 25 basis points.
The rate increase reflects the Governing Council’s assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission. The September 2023 ECB staff macroeconomic projections for the euro area see average inflation at 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025. This is an upward revision for 2023 and 2024 and a downward revision for 2025. The upward revision for 2023 and 2024 mainly reflects a higher path for energy prices. Underlying price pressures remain high, even though most indicators have started to ease. ECB staff have slightly revised down the projected path for inflation excluding energy and food, to an average of 5.1% in 2023, 2.9% in 2024 and 2.2% in 2025. The Governing Council’s past interest rate increases continue to be transmitted forcefully. Financing conditions have tightened further and are increasingly dampening demand, which is an important factor in bringing inflation back to target. With the increasing impact of this tightening on domestic demand and the weakening international trade environment, ECB staff have lowered their economic growth projections significantly. They now expect the euro area economy to expand by 0.7% in 2023, 1.0% in 2024 and 1.5% in 2025.
Inflation continues to decline but is still expected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It therefore decided at its meeting on 27 July 2023 to raise the three key ECB interest rates by 25 basis points.
The rate increase reflects the Governing Council’s assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission. The developments since its meeting on 15 June support the expectation that inflation will drop further over the remainder of 2023 but will stay above target for an extended period. While some measures show signs of easing, underlying inflation remains high overall. The past rate increases continue to be transmitted forcefully: financing conditions have tightened again and are increasingly dampening demand, which is an important factor in bringing inflation back to target.
Inflation has been coming down but is projected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. It therefore decided at its meeting on 15 June 2023 to raise the three key ECB interest rates by 25 basis points.
The rate increase reflects the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission. According to the June 2023 Eurosystem staff macroeconomic projections for the euro area headline inflation is expected to average 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. Indicators of underlying price pressures remain strong, although some show tentative signs of softening. Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation. They now see it reaching 5.1% in 2023, before it declines to 3.0% in 2024 and 2.3% in 2025. Staff have slightly lowered their economic growth projections for this year and next year. They now expect the economy to grow by 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025.
The inflation outlook continues to be too high for too long. In light of the ongoing high inflation pressures, the Governing Council decided at its meeting on 4 May 2023 to raise the three key ECB interest rates by 25 basis points. Overall, the incoming information broadly supports the assessment of the medium-term inflation outlook that the Governing Council formed at its previous monetary policy meeting on 16 March. Headline inflation has declined over recent months, but underlying price pressures remain strong. At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain.
Inflation is projected to remain too high for too long. Therefore, on 16 March 2023 the Governing Council decided to increase the three key ECB interest rates by 50 basis points, in line with its determination to ensure the timely return of inflation to the 2% medium-term target. The elevated level of uncertainty reinforces the importance of a data-dependent approach to the Governing Council’s policy rate decisions, which will be determined by its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.
The Governing Council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target. Accordingly, at its meeting on 2 February 2023, the Governing Council decided to raise the three key ECB interest rates by 50 basis points and it expects to raise them further. In view of the underlying inflation pressures, the Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. In any event, the Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.
At its meeting on 2 February 2023, the Governing Council also decided on the modalities for reducing the Eurosystem’s holdings of securities under the asset purchase programme (APP). As communicated in December, the APP portfolio will decline by €15 billion per month on average from the beginning of March until the end of June 2023, and the subsequent pace of portfolio reduction will be determined over time. Partial reinvestments will be conducted broadly in line with current practice. In particular, the remaining reinvestment amounts will be allocated proportionally to the share of redemptions across each constituent programme of the APP and, under the public sector purchase programme (PSPP), to the share of redemptions of each jurisdiction and across national and supranational issuers. For the Eurosystem’s corporate bond purchases, the remaining reinvestments will be tilted more strongly towards issuers with a better climate performance. Without prejudice to the ECB’s price stability objective, this approach will support the gradual decarbonisation of the Eurosystem’s corporate bond holdings, in line with the goals of the Paris Agreement.
On 15 December 2022 the Governing Council decided to raise the three key ECB interest rates by 50 basis points and, based on the substantial upward revision to the inflation outlook, expects to raise them further. In particular, the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target. Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations. The Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.
At its meeting on 27 October 2022, the Governing Council decided to raise the three key ECB interest rates by 75 basis points. With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation. The Governing Council took its decision, and expects to raise interest rates further, to ensure the timely return of inflation to the ECB’s 2% medium-term inflation target. The Governing Council will base the future policy rate path on the evolving outlook for inflation and the economy, following its meeting-by-meeting approach.
Inflation remains far too high and will stay above the target for an extended period. In September, euro area inflation reached 9.9%. In recent months, soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand have led to a broadening of price pressures and an increase in inflation. The Governing Council’s monetary policy is aimed at reducing support for demand and guarding against the risk of a persistent upward shift in inflation expectations.
On 8 September 2022 the Governing Council decided to raise the three key ECB interest rates by 75 basis points. This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the Governing Council’s 2% medium-term target. Based on the Governing Council’s updated assessment, over the next several meetings it expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations. The Governing Council will regularly re-evaluate its policy path in light of incoming information and the evolving inflation outlook. Its future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.
At its meeting on 21 July 2022, in line with its strong commitment to its price stability mandate, the Governing Council took further key steps to make sure inflation returns to its 2% target over the medium term. The Governing Council decided to raise the three key ECB interest rates by 50 basis points and approved the Transmission Protection Instrument (TPI).
The Governing Council judged that it was appropriate to take a larger first step on its policy rate normalisation path than signalled at its previous meeting. This decision was based on the Governing Council’s updated assessment of inflation risks and the reinforced support provided by the TPI for the effective transmission of monetary policy. It will support the return of inflation to the Governing Council’s medium-term target by strengthening the anchoring of inflation expectations and by ensuring that demand conditions adjust to deliver its inflation target in the medium term.