German economic output is expected to rise again slightly in the second quarter of 2023, the Bundesbank writes in the May edition of its Monthly Report. According to the Federal Statistical Office’s flash estimate of end-April 2023, real gross domestic product (GDP) remained unchanged on the quarter after seasonal adjustment. High inflation weighed on private consumption expenditure and consumption-related service providers. By contrast, declining supply bottlenecks and lower energy prices gave industry a boost. Construction benefited from the mild weather. 

Labour market remains robust despite slight uptick in unemployment

In the labour market, the marked increase in employment seen in the autumn continued into the first quarter of 2023, the Bundesbank’s experts write. Leading indicators point to only fairly minor improvements in what otherwise remains a robust labour market in the coming months. 

The number of unemployed persons rose by a total of 43,000 in March and April, with the unemployment rate up by 0.1 percentage point to 5.6%. In April, the Federal Employment Agency recorded 2.57 million persons as unemployed, around 276,000 more than in April 2022. Factors contributing to the rise in unemployment included weak economic activity in some sectors of the economy and the large influx of refugees, for example from Ukraine. While the Bundesbank’s experts regard the overall labour market outlook as slightly positive, they point out that it has not brightened further in recent months. 

Inflation increasingly leaving its mark on wage rises 

Including additional benefits, negotiated wages were up by 3.9% on the year in the first quarter, compared with 2.0% a quarter earlier. The latest wage agreements exceeded the wage increases agreed last year. Given high inflation, a robust labour market situation and the expected improvement in economic activity, the experts anticipate high wage settlements in the coming months as well.

Inflation, which is now broad-based and rather persistent, is increasingly leaving its mark on wage rises, with employers in areas not bound by collective labour contracts also making greater use of the possibility of paying inflation compensation bonuses. With regard to the current wage rounds, the expected improvement in economic activity and reduced uncertainty surrounding the energy supply are providing tailwinds for efforts to do more than hitherto to offset past real wage losses. There is much to suggest that firms will pass on part of the increased wage costs through their prices as the year progresses, according to the Bundesbank’s Monthly Report.

Consumer prices (HICP) rose less sharply at the beginning of the year than in the preceding quarters. On average for the months of January to March 2023, they increased by a seasonally adjusted 0.9%, compared with 2.6% in the final quarter of 2022. Looking at the year-on-year figures, the inflation rate declined from 10.8% to 8.8% in the first quarter of 2023. This was primarily because energy prices rose less strongly on the year. A completely different picture is still presented by food, the prices of which surged. Excluding volatile components such as energy, food, travel services and clothing, the inflation rate rose significantly in the second quarter, climbing from 5.0% to 5.8%. It thus exceeded the core rate (5.5%), from which energy and food prices have been stripped out. Given still high price rises, especially in the case of food, inflation is likely to recede only slowly in the months to come. 

Slight increase in GDP expected in the second quarter of 2023

The Bundesbank’s experts expect economic output to go back up slightly in the second quarter of 2023. Diminishing supply bottlenecks, large order backlogs and lower energy prices are all supporting the continued recovery in industry. Despite continued high inflation, robust wage increases should at least mean households’ real net income does not fall any further. Private consumption is therefore likely to stagnate.