Germany’s economy performed better than expected in the fourth quarter and “more or less” stagnated, according to the Bundesbank, confirming an earlier estimate that fed optimism over the euro zone dodging a winter recession.
(Bloomberg) — Germany’s economy performed better than expected in the fourth quarter and “more or less” stagnated, according to the Bundesbank, confirming an earlier estimate that fed optimism over the euro zone dodging a winter recession.
“High inflation and uncertainty in view of the war in Ukraine weighed on the economy in the fall quarter, but the situation on energy markets eased noticeably compared to the summer,” the Bundesbank said in its monthly report.
“Moreover, further fiscal measures were taken, some of which relieve private households and companies of high energy costs. Supply bottlenecks in industry and construction also became less relevant,” it said Monday.
Improving confidence has fueled hope that a downturn in Europe’s biggest economy, which seemed inevitable just weeks ago, may be shallow or may not happen at all. The statistics office reported on Jan. 13 that a contraction may have been avoided in the final quarter of 2022.
The Bundesbank predicts a “slightly positive” employment trend in the coming months. That should underpin consumption, even as price pressures remain strong.
A slowdown in inflation in December to 9.6% was mainly due to one-off fiscal relief, the Bundesbank said. “It should therefore be temporary.”
While gas and electricity price caps will be reflected in official price statistics from January, “these should dampen the inflation rate less than the emergency aid in December.”
Last month, the central bank predicted German inflation would average 7.2% this year and 4.1% in 2024. Since then, Bundesbank President Joachim Nagel has argued that additional measures are needed to curb rising expectations of future prices and return euro-area inflation to the 2% goal.
Yield Curves
Discussing yield curves, the Bundesbank said money markets are betting on rising interest rates through the fall. But it said current prices likely overstate expectations for where borrowing costs are headed because uncertainty over inflation boosts the term premiums market participants demand.
Past increases in term premiums have signaled traders were questioning the central bank’s resolve to fight inflation when a supply shock sent prices surging.
“The fight against inflation must therefore be given top priority in order to ensure that the credibility of monetary policy is maintained,” the Bundesbank said. “Otherwise, the uncertainty of market participants about the development of inflation threatens to translate into an unanchoring of inflation expectations in the medium and long term.”
After raising rates by 250 basis points in the second half of last year, European Central Bank policymakers have flagged another half-point step next month and promised determination in bringing euro-area inflation — still near 10% — back to the 2% target. The aggressive response has raised concerns that parts of the economy and markets will struggle to digest the shift.
In a separate article, the Bundesbank said available data and models indicate the latest monetary-policy changes are feeding through to the real economy as expected. The current stance is appropriate, also when taking into account the financial stability risks it creates.
“In view of the currently stable situation of the banking system in the euro area, it’s unlikely that the tightening of monetary policy envisaged by the Governing Council of the ECB will lead to major negative feedback loops between the financial system and the real economy,” the Bundesbank said.
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