Deutsche Bank cuts forecast: Germany's economy faces challenges

Deutsche Bank has reduced its forecast for the German economy, anticipating a shrink in Germany's GDP by 0.5 percent in 2023. This is a diminished outlook compared to the previous forecast that predicted a drop of only 0.3 percent. The bank also holds a less optimistic view of the state of affairs in 2024.

The bank anticipates minimal recovery at 0.3 percent, a significant decrease from the initially projected 0.7 percent, as reported by businessinsider.de. Deutsche Bank attributes its adjusted forecast to weak data emerging from the German economy.

Germany's GDP for the third quarter declined by 0.8 percent year on year, and 0.1 percent quarter on quarter. The main impediment appeared to be weak consumer demand. "The marginal 0.1 percent increase in consumption over the previous quarter was disappointing," Deutsche Bank Research acknowledged on its blog.

Economists explain further that the nominal income, which increased year on year by 6.9 percent, is significantly lower in real terms due to inflation. Even though it has fallen below 4 percent, it is still holds considerable impact.

How do German economists interpret these events ? "The German economy was particularly affected by repercussions of Russia's attack on Ukraine. High energy prices contributed to a steep inflation rate in Germany in 2022. Many economists believe that the situation in Ukraine, energy prices and inflation will continue to cause uncertainty for the economy in 2023," according to an analysis quoted by the service. The slowing pace of the global and Chinese economies, which has led to a decline in German exports, compounds the problem.

The service gathered analyses from several institutions - including the federal government, the European Commission, the International Monetary Fund, Bundesbank and numerous economic institutions. All of them predict a decrease in GDP in 2023. The most optimistic forecasts indicate a reduction of 0.2 percent while the most pessimistic predict a 0.7 percent drop.

"Changes to forecasts for 2023 by all economic institutions, banks and other institutions now anticipate only a slight increase in 2024," the service reports, reinforcing the point by noting that in the related graphic, all signs depicting worsening forecasts are represented in 'red'.

The German economy is further complicated by its budgetary situation. Earlier this month, the German Constitutional Court deemed it unconstitutional for the government to transfer 60 billion euros from pandemic debt to a special Climate and Transformation Fund. This decision signifies a substantial deficit in the budget planned by the current government.

This implies that 60 billion euros previously allocated for expenditure for the Climate and Transformation Fund will now be unavailable. This poses a monumental challenge for the governing coalition, which is currently planning the budget for 2024. Despite this, German Chancellor Olaf Scholz announced that talks regarding next year's budget will "proceed as planned".

Analysts from Allianz predict that the trough of the GDP growth slowdown in Central and Eastern Europe (CEE) is already behind us. They anticipate a resurgence to come in 2024. "Declining inflation and interest rates ought to support the revival of domestic demand in Central and Eastern Europe," they suggest.