The German economy stagnated in the second quarter of 2023, following a decrease in real GDP of 0.1% in the first quarter. For both quarters, growth was significantly weaker than previously expected. Real wage losses continued to weigh on private consumption during the first half of 2023. Additionally, weak dynamics in external demand led to subdued exports. Public consumption declined in the first quarter, reflecting the progressive phasing out of COVID-19- related spending. By contrast, a rebound in investment from a weak last quarter of 2022 supported growth.
Since January 2023, confidence indicators for manufacturing have been on a downward trend. This was particularly pronounced in the energy-intensive industries. There, the energy price shock following Russia’s war of aggression against Ukraine hit particularly hard. Even after this shock subsided, energy price levels remained elevated in comparison to production locations elsewhere, especially outside of Europe, which negatively impacts competitiveness. More recently, in May, indicators for the services sector also started to decline, reflecting a weakness in manufacturing-related services as well as in transport and logistics. Despite the negative sentiment, a turnaround to positive real wage growth is expected to lead to a subdued recovery in the third and fourth quarters, driven by private consumption.
On an annual basis, the economy is now projected to shrink by 0.4% in 2023. This is a downward revision compared to the 0.2% growth projected in the Spring Forecast. A weak overall outturn for consumption and a decline in construction investment are forecast to negatively impact growth, despite support from an uptick in equipment investment. While weak external demand depresses exports, net exports are expected to contribute positively to growth due to falling imports.
In 2024, real GDP is forecast to rebound by 1.1% driven by a recovery in consumption. This is less than projected in the spring due to a slowdown in the construction sector, as well as to less dynamic exports growth.
Headline inflation in 2023 is expected to come down to 6.4%, implying a downward revision from the Spring Forecast, and to 2.8% in 2024, slightly higher than projected in the spring. In the first half of 2023, energy and service price inflation fell more than expected. Nonetheless, service inflation is set to remain elevated as wages rise. This, in combination with high food prices and core inflation, is expected to make headline inflation remain high in 2023. In 2024, a gradual slowdown in goods prices is set to lead to a decrease in headline inflation. Falling energy price inflation is also expected to contribute to this slowdown, albeit less than previously forecast.