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The German economy is set to continue shrinking in the first three months of this year, the country’s central bank has predicted, blaming uncertainty over government policy as well as transport strikes and weak consumer and industrial demand.

The Bundesbank said in its monthly report on Monday that “stress factors would probably remain in the first quarter”, adding that this meant “economic output could therefore decline slightly again”.

Germany’s economy shrank 0.3 per cent in both the fourth quarter and over the whole of 2023, making it the worst performing major economy in the world last year. 

The central bank said there were few signs of a rebound at the start of this year, warning: “With the second consecutive decline in economic output, the German economy would be in a technical recession.” 

Robert Habeck, the country’s economics minister, said last week that the government would revise down its growth forecast for this year from 1.3 per cent to 0.2 per cent and for next year from 1.5 per cent to 1 per cent when it issued an updated outlook on Wednesday.

The government was left with a €60bn hole in its spending plans after the constitutional court last November banned the use of off-budget financing vehicles to bypass the country’s debt brake. Habeck said this “has an immediate growth-crimping effect”.

The Bundesbank seemed to agree that doubts over government fiscal policy were weighing on confidence, saying “uncertainty regarding transformation and climate policy remains elevated”. The central bank said recent train and airport strikes could hit production in the first quarter, while order books for industry and construction were “dwindling”.

Foreign demand for German industrial goods had “recently trended down significantly”, it added, while consumers in the country were “probably still cautious about their spending” and higher borrowing costs “are likely to continue to dampen investments”.

However, the central bank said it did not expect “a recession in the sense of a significant, broad-based and long-lasting decline in economic output”, especially as household spending was “likely to continue to improve against the background of a stable labour market, sharply rising wages and a falling inflation rate”.

Economists expect the German economy to slowly recover this year, helped by recent falls in gas prices, lower inflation and continued strong growth in wages. 

Holger Schmieding, chief economist at German bank Berenberg, forecast Europe’s largest economy would grow 0.4 per cent this year “with the risk to the downside stemming from a probably still very weak first quarter”.

German companies were still suffering from a “painful inventory correction” as they produce less than they sell and order less than they need from suppliers, Schmieding said. But he forecast this would ease “by Easter” and said “consumer spending should rebound from spring onwards”.