“In the final quarter of 2022, real gross domestic product (GDP) is likely to have more or less stagnated, and thus exceeded previous expectations,” the Bundesbank’s Monthly Report states. Although high inflation and uncertainty surrounding the war in Ukraine weighed on the economy, the situation in the energy markets eased markedly compared with the third quarter. In addition, the report notes that further fiscal measures were taken which will alleviate some of the pressure households and enterprises are facing due to high energy costs. Moreover, supply bottlenecks in industry and construction subsided. However, high inflation dampened households’ propensity to spend: “On an average of October and November, price-adjusted sales in both the retail and the accommodation and food service sectors fell significantly compared with the third quarter,” the economists write.

Economic recovery in 2022 dampened by Ukraine war

According to provisional calculations by the Federal Statistical Office, real GDP rose by 1.9% on the year in 2022 as a whole. “It thus slightly exceeded its pre-pandemic level once again,” the Bundesbank reports. However, the economic recovery was weakened by Russia’s war of aggression against Ukraine, which led to new supply chain problems. The further spike in inflation and uncertainty about energy supply caused by the war weighed on firms and households. Strong catch-up effects after most coronavirus restrictions were lifted had meant that private consumption nevertheless picked up substantially. The report states that exports and investment in machinery and equipment, i.e. investment in technical equipment, machinery and vehicles, also supported economic growth.

Steep drop in demand for industrial products

According to the Bundesbank’s economists, industrial output averaged over October and November 2022 increased slightly on the third quarter in seasonally adjusted terms. However, there were large differences in the various industrial sectors: while output in the energy-intensive industries had continued to decline significantly compared with the third quarter, it had risen markedly overall among the other industrial sectors as a group. 

The Bundesbank reports that demand for industrial products is substantially lower, however, with industrial new orders falling steeply in November 2022 after adjustment for seasonal variations. “Demand for industrial goods thus fell back below its pre-pandemic level for the first time since August 2020,” the economists write. On an average of October and November, too, orders were down considerably on the third quarter. 

Inflation rate temporarily back to single digits in December

In December, consumer price dynamics continued to weaken, the Monthly Report states. This was due, in particular, to the significantly lower energy prices. The government’s assumption of advance payments for gas and district heating, referred to as December immediate assistance, had led to a significant decline here. “As a result, the Harmonised Index of Consumer Prices (HICP) was 1.5% lower on the month after seasonal adjustment,” the economists write. However, they note that prices for non-energy components such as food as well as industrial goods and services continued to increase sharply. In December, the annual inflation rate in Germany had stood at 9.6%, but the economists believe this was a temporary decrease, as it was mainly attributable to the immediate assistance in December. The report goes on to say that the core inflation rate, which strips out energy and food prices, climbed slightly by 0.3 percentage point to 5.4%, however, thus reaching a new all-time high.

Historically high inflation in 2022

The Bundesbank writes that historically high inflation rates had also been recorded in 2022 as a whole. As measured by the HICP, the annual rate was 8.7%, which was by far the highest figure since the introduction of the euro. Several factors were identified as the main causes, such as rising aggregate demand amid the subsiding coronavirus pandemic, whilst at the same time global supply chains were still constrained and the Russian invasion of Ukraine had price-driving effects

Employment outlook remains slightly positive

Employment rose significantly in November. “The substantial increase in the minimum wage as from 1 October has had no discernible negative impact,” the economists find. Looking at the leading indicators, they expect employment growth to be slightly positive in the coming months. Registered unemployment fell slightly by 13,000 persons to 2.52 million in December after adjustment for seasonal variations. The unemployment rate remained at 5.5% due to rounding.