Germany's Economy to Shrink 0.4 Percent in 2023

A "surprisingly weak" second quarter made the correction necessary, the DIW said in a statement. Above all, "sluggish consumption" by private households in Germany and "weakening exports" had "put the brakes on recovery in this country for the time being."

After a short winter recession, GDP stagnated in the second quarter, according to the Federal Statistical Office (Destatis).

At the beginning of the year, Germany's government had still expected the country's economy to narrowly avoid a recession at 0.2 percent growth.

As consumer prices are normalizing more slowly than elsewhere in Europe, Germany is coming under pressure as a business location. Inflation still stood at 6.1 percent in August, compared to 5.3 percent in the eurozone, according to official figures.

Food remained the main inflation driver in Germany, with increases in many product groups "markedly higher than overall inflation," Destatis said on Friday. Prices for energy products also rose at an above-average rate, picking up again to 8.3 percent.

The DIW anticipates that for the entire year of 2023, inflation will persist at a level similar to the current rate, hovering around 6.1 percent, without nearing the European Central Bank's 2 percent target until the end of next year.

Consumers are becoming increasingly cautious. According to the German Retail Association, recovery in consumer sentiment, which already weakened in recent months, was now "coming to a standstill" in September.

For the German industry, high energy prices pose a locational disadvantage in international competition, which experts warn could have a long-term impact. If no countermeasures were taken, this would cause a welfare loss of up to 4.5 percent over the next 15 years, according to a recent study by the German Economic Institute and Frontier Economics.

In July, Germany's industry already produced 0.8 percent less than in the previous month, marking the third consecutive month with falling output, according to Destatis. New international orders even dropped by 12.9 percent month-on-month.

For the coming year, the DIW holds a more optimistic outlook due to lower inflation and rising consumer sentiment. The German economy is forecast to get off to a "buoyant start" with an expected growth rate of 1.2 percent in 2024, the institute predicted.

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