ECB confronts rate cut debate amid Germany's near recession

Company News

by Glenn Dyer


European Central Bank (ECB) members are actively opposing the idea of a rate cut pivot, while U.S. investors observe the Federal Reserve's movements. However, a near recession in Germany raises questions about the ECB's potential course of action.

According to a preliminary report from Germany's Statistics Office on Monday, Germany's GDP contracted by 0.3% in the three months leading up to December. This decline, while not entirely unexpected given the year's pessimistic economic indicators, does not constitute a recession, as the GDP estimate for the September quarter was revised to show flat growth, up from an earlier figure of a 0.1% contraction.

In response to the economic situation, German 10-year bond yields rose by 5 basis points to 2.195%, reaching their highest level in a month. European Central Bank officials have pushed back against market expectations for rapid interest rate cuts in the coming year. Governing Council member Robert Holzmann emphasised on Monday that one should not assume rate cuts will occur this year, and he even suggested the possibility of no movement in 2024.

Despite the recovery attempts, the German economy did not fully rebound from the sharp downturn it experienced in the first year of the COVID-19 pandemic. However, by 2023, the GDP had risen by 0.7% compared to 2019, the year preceding the pandemic.

Ruth Brand, president of the statistics office, remarked on the overall economic challenges faced by Germany in 2023. She noted, "Despite recent price declines, prices remained high throughout the economic process, putting a damper on economic growth. Unfavorable financing conditions due to rising interest rates and weaker domestic and foreign demand also took their toll."

Looking ahead, economists do not anticipate a significant improvement. Andrew Kenningham, Chief Europe Economist at Capital Economics, commented, "The recessionary conditions that have persisted since the end of 2022 are likely to continue this year," predicting flat growth for Germany in the coming year.

In December, German inflation rose to an annual rate of 3.7%, up from November's 3.2%, primarily due to a slight increase in energy costs, especially oil. However, this rise was influenced by the base effect of December 2022 when government energy subsidies lowered the headline rate. Despite this recent increase, the annual inflation rate for the year slowed to 5.9%, which remains significantly higher than the 2.9% forecast for the euro area in 2023.

Capital Economics' Kenningham noted that while the recent moderation in inflation might provide some relief for households, residential and business investment are expected to contract, construction is headed for a steep decline, and the government is implementing sharp fiscal policy tightening.

Furthermore, the government faces a growing political crisis due to spending cuts, including reductions in energy subsidies to farmers and others, causing discontent among affected groups.

Commerzbank's Chief Economist Joerg Kraemer expressed concern about the German economy's minimal growth since the outbreak of the COVID-19 pandemic, drawing parallels to the years following the burst of the stock market bubble at the start of the millennium.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

Subscribe to our Daily Newsletter?

Would you like to receive our daily news to your inbox?