German Economy Bottoms Out
“The German economy bottomed out in the summer, and starting in the fall, things should slowly start picking up again,” says Timo Wollmershäuser, Head of Forecasts at ifo. His comments are in response to the German Federal Statistical Office’s report that the country’s economic output fell by 0.1% in the third quarter of 2023. “The ifo Business Climate Index rose in October for the first time since April. The outlook for the coming months in particular has brightened, but companies are also assessing their current situation as somewhat better,” Wollmershäuser says to explain the rise. He adds: “According to our estimates, economic output should increase by 0.1% in the fourth quarter.”
The recovery is likely to be triggered by a reinvigoration of overall purchasing power. By the end of the current year, terms of trade are expected to return to their levels from before the outbreak of the coronavirus crisis. One reason for this expectation is that the prices of most imported goods, particularly energy, have fallen sharply. Another is that exporters were able to pass on higher production costs. Such termsof-trade gains increase the scope for distribution and allow higher nominal wage increases for a given productivity trend without further fueling domestic price inflation. As a result, private household incomes are rising more strongly than prices, so purchasing power is expected to increase and private consumption to rise gradually. The inflation rate will continue on its downward trend. Many consumer prices are already rising only slightly over the course of the year, with some already falling.
Manufacturing will benefit from the terms-of-trade gains and the revival of consumer spending. Demand for German goods is likely to pick up again, partly because the global interest rate cycle has peaked. By contrast, residential construction will continue to cool. It is true that the sharp rise in prices for new residential construction has nearly stopped and that market prices for newly constructed residential real estate (i.e., buildings including land) have been falling for a year. From the point of view of builders, however, this relief does not yet appear to be enough to offset the noticeable increase in financing costs. At least, this is indicated by the continued decline in orders and the ongoing level of cancellations among construction companies.
Further escalation of the conflict in the Middle East poses a significant risk to this economic recovery. At any rate, that’s the lesson from 1973, when the Arab oilproducing countries imposed an oil embargo in response to the Yom Kippur War. Within a few months, the average price of oil quintupled from USD 2.70 to USD 13 per barrel, triggering severe recessions and sharp increases in inflation in the industrialized countries of the time. So far, oil prices have risen only about 6% since the outbreak of the conflict, but further developments are uncertain and depend on the actions of the Arab oil-producing states in the region.
