German economy to shrink in Q3

The German economy, the biggest in Europe, is likely to shrink this quarter as industry is in recession and private consumption is adding little to growth, the Bundesbank said in a monthly economic report on Monday.

Germany suffered a brief recession around the turn of the year and produced flat growth in the second quarter, so a contraction in the current period would mean four straight quarters with negative or flat growth.

"Despite the somewhat slowing pace of price increases, strong wage increases and the good labour market, private households are still holding back on spending," the central bank said.

"In addition to consumer restraint, the increasing weakness of industry is also weighing on economic performance," it added.

Euro zone inflation has halved since late 2022 but at 5.3%, remains uncomfortably high and the European Central Bank (ECB) has now raised its deposit rate to a record high 4% to arrest quick price growth.

This rise in financing costs will also weigh on growth, the Bundesbank said, as will the declining order intake for the country's vital and vast industrial sector.

"The low and continued decline in incoming orders, and the declining order backlog are increasingly having an impact on industrial production," the central bank said.

Germany's industry, heavily exposed to exports, has been particularly hard hit by weak demand from China and its prospects for recovery remain weak, market economists say.