“The German economy beat last month’s expectations in the first quarter of 2023,” according to the Bundesbank’s latest Monthly Report. While persistently high inflation weighed on private consumption, industry saw a stronger recovery than expected. Industrial output was supported by still lower energy prices, a further easing of supply bottlenecks and a recovery in demand, increasing significantly in both January and February after seasonal adjustment. German exports of goods were also up steeply again. The construction sector expanded its output significantly again for a time, although demand was still dampened by higher construction prices and financing costs. 

Private consumption and consumer-related service providers suffered in the first quarter from high inflation and the resulting reluctance to buy, the Monthly Report states. Especially in the retail sector, seasonally and price-adjusted sales fell perceptibly on average in January and February compared with the previous quarter. The number of new motor vehicle registrations was down substantially, too. However, this was also due to a one-off effect, with government subsidies for hybrid and electric vehicles expiring at the end of 2022 and consumers therefore likely to have brought forward their purchases.

Positive outlook for the labour market

“The improved economic developments in the first quarter were also reflected in the continued slightly positive developments on the labour market,” the Bundesbank’s economists write. In February, the number of persons in employment was up by around 31,000 on the month after seasonal adjustment. According to the Bundesbank’s experts, leading indicators of employment growth suggest continued positive developments on the labour market.

Despite the slight increase in employment, registered unemployment rose by 16,000 to 2.54 million persons in March after seasonal adjustment. The unemployment rate climbed to 5.6% and the number of unemployed persons went up by 232,000 on the year. The economists attribute this mainly to Ukrainian nationals who were not yet included in the German social security system a year ago. They expect unemployment to fall slightly in the coming months.

Inflation excluding energy and food at all-time high

Pressure on consumer prices remained high in March. The Harmonised Index of Consumer Prices (HICP) was up by 0.6% on the month in seasonally adjusted terms, more or less the same as in February. There was a marked increase, in particular, in prices of unprocessed food, such as fruit and vegetables, but all other goods and services became more expensive as well. Only the rise in energy prices stalled. 

Compared with the previous year, however, the inflation rate fell significantly to 7.8% in March, putting it 1.5 percentage points lower than in February. The Bundesbank attributes this decline to a base effect. By contrast, the core inflation rate excluding energy and food rose distinctly by 0.5 percentage point to 5.9%, and thus reached a new historical high. In the coming months, inflation is expected to continue to decline somewhat, in particular on account of falling energy prices and possibly a gradual easing of price rises for food, other goods and services. According to the Bundesbank, underlying price pressures are likely to remain high overall over the next few months.