FRANKFURT, April 22 - Germany's economy expanded at a modest rate in the first quarter, the Bundesbank said on Wednesday, with healthy industrial output and services activity underpinning overall performance. Yet the central bank cautioned that mounting headwinds - notably higher energy costs and uncertainty related to the Iran war - are likely to damp growth prospects in the current quarter.
The Bundesbank noted that Europe’s largest economy has been broadly stagnant for three years. That extended period of weak growth has left policymakers banking on a large-scale programme of public investment in infrastructure and defence to jump-start expansion. The bank warned, however, that the outbreak of war in Iran now jeopardises those hopes.
According to the monthly report, the conflict already eroded consumer confidence at the end of the first quarter. Despite that hit to sentiment, the Bundesbank said overall economic performance remained largely unaffected in Q1 thanks to strong business-related services, rising industrial sales and healthy exports.
But the central bank added that headwinds are intensifying. "Looking ahead to the second quarter, only a slight expansion is anticipated, at best," it said. The report said fiscal policy should provide "increasingly positive impulses from the more expansionary fiscal policy are expected to take effect," while warning that "on the other hand, the effects of the war in the Middle East are expected to burden the German economy more broadly and noticeably."
The Bundesbank set out the channels through which the Iran war is affecting the economy. It said the conflict has increased energy prices, created supply chain problems, raised uncertainty, lifted market-based interest rates, and worsened the export outlook.
The central bank also pointed to a weakening in private consumption that pre-dated the war. Consumption was already losing traction before the conflict and then "took a clear hit in March as higher fuel prices lowered households’ purchasing power," the report said.
Looking at forward indicators, the Bundesbank said "Export and business expectations point to a more subdued outlook." It added that this softer outlook is likely driven not only by higher energy costs and supply-chain disruptions, but also by worries about weaker global demand in the wake of the war in the Middle East.
Overall, the Bundesbank characterized the near-term picture for Germany as one of fragile growth with intensifying downside risks tied to energy markets, trade channels and household spending.