German Bundesbank: Output Down in 1Q, But Basic Tendency Still Robust

19 April 2021

By David Barwick – FRANKFURT (Econostream) – Germany’s economy headed south during 1Q but is still in essentially robust condition, the German Bundesbank said on Monday.

In its latest monthly bulletin, the German central bank repeated its expectation of HICP rates well above 3% in the latter part of the year.

‘Economic output in Germany declined in the first quarter of this year’, the Bundesbank said. In addition to the impact on the service sector of further pandemic containment measures, last year’s VAT reduction had led to front-loading of private consumption that ceased as of January, it said.

Moreover, the reversal of the VAT reduction also dampened construction activity, as did weather in the early part of the year, according to the bulletin. Industrial production also did poorly in early 2021, possibly due to insufficient supply of intermediate goods, in particular for the auto industry, it said.

To the extent not directly affected by the measures, the German economy ‘remained robust in its basic tendency’, the Bundesbank said. In manufacturing, ‘[t]he already strong order intake has continued to rise since the beginning of the year, driven by dynamic demand from abroad’, it said.

‘The further brightening of the business situation as well as markedly improved production and business expectations according to surveys by the Ifo Institute in March also indicate that the recovery in industry will continue’, it added.

Although in the coming months the statistical effect leading to a larger-than-usual difference between national CPI and harmonized CPI ‘will first fade out and then turn negative’, the Bundesbank said, ‘[n]evertheless, higher HICP rates can be expected from the second half of the year onwards due to the base effect of the temporary VAT cut in the previous year.’

‘From today's perspective, they could clearly exceed 3 % by the end of the year’, it said, echoing the March bulletin.