WIESBADEN (dpa-AFX) - A significant drop in inflation is raising hopes that the German economy will pick up again. According to preliminary data released by the Federal Statistical Office on Monday, the annual inflation rate was 3.8 percent in October. That was the lowest level since August 2021, when it was also 3.8 percent. "Falling inflation rates also brighten the economic outlook," explained VP Bank chief economist Thomas Gitzel. According to Ifo's Head of Business Cycle Timo Wollmershäuser, the German economy has bottomed out: "Things should slowly start to pick up again in the fall."

In the summer, consumer reticence in particular slowed down the German economy. Gross domestic product (GDP) fell slightly by 0.1 percent in the third quarter compared with the previous quarter, adjusted for price, seasonal and calendar effects, as the Federal Statistical Office also announced on Monday in an initial estimate. According to the Wiesbaden-based agency, positive impetus came from companies' investments in equipment, for example in vehicles and machinery.

According to the latest data, economic output had still grown slightly in the spring (plus 0.1 percent), but stagnated at the beginning of the year. The German economy thus performed somewhat better than expected. Statisticians had initially calculated stagnation in the second quarter and a decline in economic output at the beginning of the year.

Private consumption is an important pillar of the German economy. However, significantly higher prices are weighing on consumers. They can afford less for their money. Many people are cutting back on consumer spending. In October, the above-average rise in food prices (up 6.1 percent) compared with the same month a year earlier also weighed on people. In contrast, energy prices fell for the first time since January 2021, by 3.2 percent, according to preliminary data.

According to many economists, inflation is likely to weaken further in the coming months. Economist Friedrich Heinemann of the Mannheim-based research center ZEW expects inflation to fall toward the three-percent mark by the end of the year.

According to Ifo's head of economic research, Wollmershäuser, private household incomes are likely to rise more strongly than prices, "so that a rise in purchasing power and a gradual increase in private consumption can be expected."

Exports feel weakness in the global economy

The German economy is also facing headwinds from higher interest rates. These are depressing demand for construction services, among other things. At the same time, the export industry is feeling the effects of the weakness of the global economy. Economist Gitzel does not expect foreign trade to provide any impetus for the export-oriented German economy for the time being.

Nevertheless, the mood in the German economy improved in October for the first time in six months. Both the current situation and expectations were assessed more favorably, according to the Ifo Business Climate Index. "The German economy sees a silver lining on the horizon," Ifo President Clemens Fuest recently commented.

Economic forecasts lowered

Leading economic research institutes expect German gross domestic product to shrink by 0.6 percent in 2023 as a whole. In the spring, the institutes were still assuming a mini-growth of 0.3 percent. Next year, the German economy is then expected to grow by 1.3 percent.

Meanwhile, the German government expects economic output to decline by 0.4 percent in 2023. However, German Economics Minister Robert Habeck believes that the economy has now bottomed out. "We have reached a bottom, we are leaving the valley and then it will go up again," the Green politician had said recently. Growth of 1.3 percent is also forecast for 2024.

Commerzbank chief economist Jorg Krämer is more pessimistic: "In the winter half-year, the German economy will probably shrink somewhat again because it is suffering from the massive interest rate hikes by the ECB and almost all Western central banks." At the same time, Krämer believes that consumption is unlikely to recover, contrary to the hopes of optimists./mar/DP/jsl