German economy may disappoint as sentiment worsens

FRANKFURT (Reuters) – The German economy may shrink by more this year than expected only a few weeks ago despite a small bounce in the second quarter, the Bundesbank said on Monday.

Industry-heavy Germany is bearing the brunt of a drop in global demand for goods – the result of higher borrowing costs dampening investment and people spending more on leisure, travel and other services in the aftermath of the pandemic.

The Bundesbank said Europe’s largest economy was likely to have grown slightly in the three months to June after contracting in the previous two quarters, thanks to a stabilisation in consumer spending.

But the outlook was more bleak than the central bank’s own estimate for a 0.3% contraction this year, which was published less than a month ago, due to worsening sentiment.

“The economic recovery in the remainder of the year could therefore turn out to be somewhat more timid than expected in the June forecasts,” the Bundesbank said.

It cited a survey from the Ifo institute showing that German business morale worsened for the second consecutive month in June, particularly in the industrial sector.

The Bundesbank expected inflation – the No.1 concern for it and the European Central Bank at present – to fall further in the coming months as lower producer prices are passed down the supply chain.

Core inflation, which excludes energy and food costs, should remain high, however, also thanks to a boom in packaged holidays, which now have a greater weight in the inflation index.