FRANKFURT: German output is likely to shrink slightly in the first quarter, sending Europe’s top economy into recession as it battles multiple crises, the country’s central bank warned Monday. The German economy has been struggling since Russia’s 2022 invasion of Ukraine sent inflation soaring, with the crisis compounded by an industrial slowdown and weakness in key trading partners.

After contracting 0.3 percent in the final quarter of 2023, output is “likely to once again decline slightly” from January to March, the Bundesbank said in its monthly report. “This second consecutive decline in economic output would put the German economy into a technical recession.”

The central bank listed a litany of problems facing the export powerhouse, from slowing foreign demand to constrained consumer spending and domestic investment. The economy may also be impacted by a wave of recent strikes, particularly those in the rail and aviation sectors, it said.

However it added there was “still no evidence of a recession in the sense of a persistent, broad-based and distinct drop in economic activity, nor is such a recession currently on the cards”. A robust labor market, rising wages and slowing inflation would provide support, it said.

Following a series of interest rate hikes, German inflation slowed to 2.9 percent in January — not far off the European Central Bank’s two-percent target. The German economy shrank 0.3 percent across the whole of last year. While it is expected to rebound this year, observers have recently been cautioning the recovery may be slower than previously expected. In December, the Bundesbank slashed its 2024 growth forecast to 0.4 percent, from a prediction of 1.2 percent in June.

Meanwhile, France likely overshot its budget deficit target in 2023, a finance ministry official said on Monday. President Emmanuel Macron’s government has said it was aiming for a deficit of 4.9 percent of gross domestic product (GDP) for last year, but this will “probably be difficult to meet”, the official told AFP on condition of anonymity. “The truth is that our revenues were much less dynamic than forecast at the end of the year,” the source said. The national INSEE statistics office is scheduled to report on France’s national accounts in March. The warning comes a day after Finance Minister Bruno Le Maire cut the government’s forecast for economic growth to 1.0 percent for this year from a previous 1.4 percent target. He also told the TF1 broadcaster that he would find 10 billion euros ($10.8 billion) of spending cuts this year, citing weaker-than-expected tax receipts as the reason.

The cuts would help the government meet its deficit target for this year of 4.4 percent of GDP, Le Maire told reporters Monday. He said, however, that the government was also keeping open the option of amending the budget in the summer “depending on economic circumstances and depending on the geopolitical situation”. The government has said it still hopes to bring its deficit to below 3 percent of GDP in 2027. That deficit level requirement, agreed between European Union members as part of their Stability and Growth Pact, has been suspended since 2020 first to allow countries to deal with the COVID pandemic, and then with the economic fallout of Russia’s invasion of Ukraine. EU members are currently discussing a reform of the deficit and debt rules that would allow for more flexibility. – AFP