Economy

"German economic output has now officially declined in the summer quarter. This reinforces the picture that economic activity will decline slightly in the year as a whole. The adaptability of German companies, collective energy saving and government crisis management prevented worse. Next year, thanks to declining inflation and rising incomes, the economy is likely to pick up again, primarily as a result of rising consumption."

“After ten interest rate hikes I expect the ECB to leave the deposit rate at 4% at the upcoming Council meeting. Inflation is falling in line with expectations and the impact of monetary policy on the economy is becoming increasingly visible. Bank lending to households and businesses continues to cool and monetary aggregates are shrinking. In addition, since the last interest rate decision in September, long-term bond yields have risen markedly, bringing with them an additional tightening of financing conditions. Thus, the level of key interest rates appears sufficiently restrictive at this point in time to bring about a return to price level stability. However, upside risks to inflation persist and have increased as a result of the terrible events in the Middle East. I do not expect monetary policy easing until the second half of next year at the earliest. In addition to the interest rate decision, the ECB meeting is also likely to focus on discussions of options for reducing excess liquidity. On the table are a possible increase in the minimum reserve ratio and an early end to the reinvestment of redemption amounts from the PEPP pandemic bond purchase program. While a decision on the reserve ratio is likely to be postponed and integrated into the ongoing review of the operational monetary policy framework, Council members could already decide now to accelerate balance sheet reduction from January 2024.”

“The economic outlook for the German economy is better than the current mood. The data on wage developments reported today confirm the assessment that private consumption should sustain a moderate economic recovery. The gap between inflation and nominal wage growth is visibly closing. A more significant increase in real wages can be expected at the end of the year. Driven by high price increases and the shortage of skilled workers, employees will receive the highest nominal wage increases in 30 years in the current year. On average, collectively agreed wages are expected to rise by more than 5% in 2023. A smaller increase is expected for next year. However, at around 2.5% (HICP), inflation in 2024 is likely to be much lower than in the current year, for which I expect average inflation of 6.3%. Subdued aggregate demand limits the scope for further price increases, and prices for both energy and food have already stabilised since the winter. If this development continues, real wages will rise noticeably again next year. This also gives rise to cautious optimism for the economy. In 2024, German GDP should therefore grow again after a decline of 0.4% this year, albeit only moderately at 0.8%.”

"The US economy grew by 2.4% on an annualised basis in the second quarter. The US economy is proving resilient despite the Federal Reserve's aggressive turnaround on interest rates. Stable consumer spending and nonresidential fixed investment had a positive impact. However, I continue to expect rising interest costs to slow economic activity in the second half of the year. Sentiment in the manufacturing sector has already deteriorated noticeably and the labour market, which has been clearly overheated lately, seems to be slowly cooling down somewhat. Workers will feel the impact, which will weigh on consumer spending in the coming months. However, on Wednesday, in parallel with the expected interest rate hike of a further 25 basis points, the U.S. Federal Reserve changed its assessment of current U.S. growth from "modest" to "moderate". The Fed now probably assumes that it only needs an economic dip – and not a recession – to push inflation further toward the two-percent target. This means that the US economy could come out of this interest rate cycle with a black eye.”

“With the data published today, it is official how well the euro area has weathered the acute phase of the energy crisis. Whereas a year ago a gas supply freeze was feared to lead to a significant recession just at the beginning of 2023, there is now a growth of 0.1%. In fact, the euro economy already benefited from the improvement in the supply shocks in the winter quarter. Global materials bottlenecks have largely dissipated and wholesale energy prices have fallen significantly since the end of 2022. Both gave a boost to industrial production in particular, and there was also a short-term rebound in construction output. However, the development in the services sector remains uncertain. Here, the statistical offices still have to estimate a lot in their initial reports, and it is quite possible that revisions will therefore still occur. Since the pandemic, the susceptibility to revision of the first official growth estimates has increased significantly.”