The German economy is still experiencing a period of weakness. According to the Federal Statistical Office’s flash estimate, in the second quarter of 2023, seasonally adjusted real gross domestic product (GDP) stagnated at the level recorded in the previous quarter. The current issue of the Bundesbank’s Monthly Report reports that weak foreign demand and higher financing costs are weighing on the economy. The large backlog of orders in industry and construction and abating supply bottlenecks prevented an even weaker development. The sound labour market acted as a tailwind for the economy. 

The banking sector in the euro area would be able to withstand a severe economic downturn. This is the result of the stress test conducted by the European Banking Authority (EBA) and the European Central Bank (ECB). According to BaFin and the Bundesbank, German institutions proved robust even in the particularly severe adverse scenario.

The current Monthly Report explores the factors influencing payment flows to and from Germany and how the banking system ensures that the required payments take place. The Bundesbank’s experts are in favour of excess liquidity being scaled back by the Eurosystem in the coming years to a point where the private interbank market can regain importance in the European payments space.

How might payments in the financial industry be made in future? The latest edition of the Bundesbank’s Monthly Report outlines various possible options in a world in which distributed ledger technology (DLT) is increasingly being used to settle transactions between banks. Central bank money must remain the number one choice for large-value payments, according to the Bank’s experts, though that does not necessarily mean that central bank digital currency needs to be provided directly in a DLT network setup. Nor does it entirely rule out the use of other forms of money. 

German economic output is likely to have gone up slightly again in the second quarter of 2023, according to the Monthly Report. Private consumption has stabilised after previously having fallen. According to the experts, the fact that the labour market remained in good shape, wages rose sharply and price inflation did not continue to accelerate contributed to this development. Meanwhile, the decline in foreign demand was a drag on industry and the rise in funding costs dampened domestic investment. The Bundesbank is expecting the economy to recover haltingly later in the year.

The G20 finance ministers and central bank governors are set to meet in Gandhinagar, India, from 17 to 18 July. Bundesbank President Joachim Nagel will attend the two-day meeting, which will focus on issues including the current situation in the global economy, sustainability in the financial system and the regulation of crypto-assets.

As part of the Bundesbank Invited Speaker Series, Bundesbank President Joachim Nagel discussed the digital euro with economics professor Peter Bofinger. The event was moderated by Falko Fecht, head of the Bundesbank’s Research Centre.

Upon invitation by the Research Centre, Benjamin M. Friedman, Professor of Political Economy at Harvard University, held a lecture entitled “Central banks’ battle against inflation: Implications for monetary policy”. It was followed by a panel discussion featuring Bundesbank President Joachim Nagel, Fritzi Köhler-Geib (Chief Economist, KfW Group) and Jens Ulbrich (Director General Economics, Deutsche Bundesbank). 

Bundesbank President Joachim Nagel believes that a further rise in interest rates will be necessary. Be that as it may, he told the audience at the Bundesbank symposium “Banking supervision in dialogue”, how high they still need to go was impossible to say at this point in time – it would depend on how on inflation developed, which he saw as being highly uncertain. Bundesbank Vice-President Claudia Buch referred to the many challenges for banks posed by the trends of digitalisation, demographics, decarbonisation and deglobalisation. BaFin President Mark Branson warned of greenwashing in the financial sector.

Central government has increasingly relied on off-budget entities in recent times. It uses them for various purposes, such as for the German armed forces, climate change mitigation and energy price assistance. In the current Monthly Report, the Bundesbank recommends refocusing central government finances more strongly on the core budget and making less extensive use of off-budget entities. This could also entail dissolving existing off-budget entities. “Independently of this, the government should provide meaningful information for all off-budget entities,” the experts write.