Last week’s data revealed that the Eurozone’s gross domestic product (GDP) experienced a meagre 0.1% growth during the second quarter, while consumer prices in August rose 5.3% on an annual basis, three times above the central bank’s target of 2%.

The European Central Bank (ECB) lifted its key interest rate by 25 basis point to a historic high of 4% last Thursday and also indicated that this might mark the conclusion of its year-long fight against persistently high inflation.

While this could be the final rate hike in the current ECB cycle, it does not signify the end of a period of tight monetary policy. Interest rates are expected to remain at these elevated levels well into the next year, with the ECB continuing, and potentially accelerating, its balance sheet reduction.

German stocks have dipped on Monday, following substantial gains in the previous week, as investors prepared for a week filled with central bank meetings worldwide, including rate decisions from Norway, Sweden, Switzerland, the UK, and the United States.

Global central banks will take centre stage this week, especially after the ECB’s indication of a halt to rate hikes. The Bank of England (BoE) is expected to raise rates for the 15th time later this week, while the Federal Reserve appears poised to keep rates on hold. Similar to the ECB, if the BoE does execute a rate hike, it is likely to be the final one.

Source: Tradingiew

The rally in the German equity benchmark has lost momentum over the past four months and the index has been trading sideways, fluctuating between 15,456 and 16,528. While at this stage the up trend from the September 2022 low remains intact the technical and fundamental backdrop has deteriorated, therefore investors should monitor key support of 15,456 as a break below this level could trigger a sharp pull back in the stock market.

In its monthly economic report released on Monday, the Bundesbank forecasted a contraction in the German economy this quarter. The nation’s industry is grappling with a recession, and private consumption is contributing minimally to growth. Despite solid wage increases and a strong labour market, households are exercising caution in their spending habits. Additionally, weakening industrial performance is exerting downward pressure on economic output.

Although Eurozone inflation has halved since late 2022, it remains uncomfortably high, prompting the European Central Bank to elevate its deposit rate to a record 4% to curb rapid price increases. This surge in financing costs is expected to further impede economic growth, as is the decline in orders intake by the crucial German industrial sector.

The Bundesbank emphasized that Germany’s economy is likely to contract this quarter, and to foster a more favourable long-term outlook, officials must address deep-rooted challenges to the country’s economic model. Despite moderating inflation, robust wage growth, and a resilient labour market, consumer spending remains subdued. Meanwhile, the manufacturing sector’s weaknesses are intensifying, and higher financing costs could exacerbate strains on both domestic and international demand.

Although businesses have weathered recent challenges relatively well, such as the energy price shock, and there are no imminent signs of a collapse in the manufacturing sector, there exists a widespread need for comprehensive actions to adapt to the evolving economic landscape. The Bundesbank stated in its monthly report, « The issues that require attention are multifaceted and interconnected. Politicians in Berlin are taking steps in the right direction, but these efforts must be consistently implemented and sustained. »

The rapid transition away from Russian fossil fuels, disruptions in global trade, and an aging society have ignited a debate about whether Germany is confronting a period of economic underperformance. To address the elevated energy costs resulting from the conflict in Ukraine and the green energy transition, the Bundesbank emphasized the need for the swift construction of renewable energy sources and networks, alongside simpler and expedited public planning and approval processes.