German economic output probably declined somewhat in the final quarter of 2023, according to the January Monthly Report. Weak demand from both Germany and abroad continued to put a strain on industry. The decline [in industrial output] was broadly based across all sectors, although automotive production was comparatively robust, write the economists.

Output in the construction sector was also substantially lower in seasonally adjusted terms, based on the data available up to November. Surveys conducted by the ifo Institute reveal a significant further increase in the share of firms reporting a shortage of orders. Unfavourable weather conditions probably placed an additional strain on construction output. Moreover, higher financing costs continued to dampen investment, particularly in housing construction. Bundesbank economists surmise that uncertainty about the future direction of fiscal and climate policy is also likely to have weighed on economic activity. Furthermore, consumers remained cautious and are unlikely to have increased their spending by much, even though the labour market stayed robust, inflation declined and wages rose steeply. 

Overall, the economy is currently in slightly weaker shape than expected in the December projection. The best-case scenario for the first quarter of 2024 according to the economists is for German economic output to remain stagnant. This would mean a delay in the recovery expected in the December projection, they write.

Unemployment up only marginally

Employment shook off the weak economy in November, too, the economists report. As in October, the number of persons employed rose slightly in November. Developments in employment subject to social security contributions were particularly positive. Looking at the leading indicators, the Bundesbank continues to expect a stable employment outlook. 

The Monthly Report goes on to say that registered unemployment was up only marginally in December after seasonal adjustment, having risen quite markedly in the preceding months. In December, 2.7 million persons were registered as unemployed, putting the unemployment rate at 5.9%. The average unemployment rate for 2023 as a whole is 5.7%, representing an increase of 0.4 percentage point from 2022. The economists attribute this uptick to the large number of immigrants on the one hand and to the sluggish economic growth last year on the other. 

Exceptionally high inflation in 2023

Consumer prices (as measured by the Harmonised Index of Consumer Prices – HICP) decreased slightly in December by a seasonally adjusted 0.1% on the month. Energy prices cooled further, while food prices remained unchanged and industrial goods and services became slightly more expensive, the economists report. However, they go on to say that the inflation rate picked up significantly year on year, climbing to 3.8% from 2.3% in November. According to the Monthly Report, this increase was due to a base effect stemming from the immediate government assistance for gas and district heating payments granted as a one-off in December 2022. The core inflation rate, which strips out energy and food prices, remained virtually constant at 3.4% (November: 3.5%).

According to the report, (HICP) inflation for 2023 as a whole was exceptionally high, as in the previous year. The annual average rate was 6.0% (2022: 8.7%), but it declined significantly over the course of the year. The reasons for the persistently high rate of inflation were the further increase in food prices compared with 2022, in particular, but also services prices picking up even more sharply than before. At the beginning of this year, the Bundesbank expects to see the inflation rate declining distinctly, partly due to the absence of the aforementioned December base effect which had driven up the rate.