FRANKFURT, Sept. 24 (Xinhua) -- As much as the restrictiveness of the European Central Bank (ECB) added to the hardships of Germany's economy, the future rate cuts of the central bank will play a crucial role in providing an impetus, a report published by a German research institute on Tuesday indicated.
Things are not looking up for the European Union's (EU) largest economy, which has been characterized by stagnation during the past few years and a moderate recovery is only expected sometime next year, said the report by Macroeconomic Policy Institute (IMK).
Germany's economic output dropped slightly by 0.1 percent in the second quarter after a gain of 0.2 percent in the first quarter. Looking ahead, the institute expects the economy to remain stagnant for 2024.
Although a "significant, broad-based and persistent" decline in the economic output has not been an immediate concern, the German economy continues to be weak, said the monthly report released by the German central bank, Bundesbank, last week.
Comparing the gross domestic product (GDP) in the second quarter this year with the second quarter of 2019, IMK concluded that the GDP now is only 0.4 percent higher, which means the economy "has hardly grown for five years."
The past five years saw one of the most drastic price hikes in the euro area, which largely owed to energy price increases since the onset of the conflict in Ukraine. Germany, boasting a strong manufacturing industry, bore the brunt of the energy price shocks in the block.
As the conflict rages on, the lingering effect as a result of severed or curtailed connection with Russia is still weighing on the German economy as bilateral trade continues to dwindle.
The aggressive rate hiking cycle initiated by the ECB in response to the sticky inflation in the euro area, which added a total of 450 basis points to the interest rates in a space of a little over one year, pushed interest rates to an all-time high in September last year, a sign of the restrictiveness.
The key interest rates in the euro area, which had been left at the historically highest levels until June this year, gradually found their way into the financial system. As a result, borrowing costs soared and investment and private consumption was dampened, cooling the economy.
Even if inflation has come down and disposable incomes have gone up, private consumption in the second quarter in Germany has not expanded as expected as consumers opted to save more.
The IMK report pointed out that the savings rate in the second quarter was at 11.3 percent of disposable income after seasonable adjustment, 0.3 percentage points higher than the previous quarter.
Exports have not been encouraging either. Germany's export to non-EU countries in August went down by 1.1 percent over July, and down by 1.2 percent over the same period last year.
The IMK report forecasts that exports will shrink by 0.7 percent this year. Imports, on the other hand, will decline even more by two percent.
The recovery of German economy will, according to IMK, pick up tentative momentum as the ECB has embarked on rate cutting since June.
The financing cost will be significantly lower next year with more ECB rate cuts, which will push the investment, especially in the construction sector higher some time next year.
Despite uncertainties, the IMK expects the German economy to grow by 1.1 percent in 2025.
