Germany's Economic Outlook Dims as Bundesbank Flags Q2 Risks

The Bundesbank, Germany's central bank, has issued a cautionary note in its latest monthly report, suggesting that the German economy "could suffer a setback" in the second quarter. This comes after a modest increase in real gross domestic product (GDP) in the first quarter. The bank highlights a persistently weak cyclical trend, underscored by tepid domestic and foreign demand for German industrial goods and a labor market that's showing signs of weakening.

Temporary Industrial Output Recovery and Trade Tensions

According to the Bundesbank, the slight uptick in industrial production observed in the first quarter is "likely to be only temporary." This temporary boost was partly due to increased exports to the United States ahead of anticipated tariff announcements. However, the tariffs implemented in April may "lead to corresponding setbacks in the second quarter," further straining the economy.

Inflation Forecast: A Mixed Bag

On a somewhat brighter note, inflation is expected to ease in the near term, thanks to declining energy prices and the euro's strength against the dollar. Yet, the Bundesbank cautions that the inflation outlook remains "characterised by particular uncertainty," leaving room for potential volatility.