The short-term outlook for Europe's largest economy has improved in recent months, a report by the German Council of Economic Experts said on Wednesday, but only to a  limited degree.

The panel said any upswing looks set to be limited by rampant inflation, tighter financing conditions and sluggish foreign demand.

What the experts said

The short-term outlook for the German economy has brightened slightly because of an initially stabilized energy supply situation and lower wholesale prices, the report said.

The council predicted Gross Domestic Product (GDP) growth of 0.2% in 2023, compared with its previous prediction that it would decline — also by 0.2%.
The five experts who compiled the report said they expected growth of 1.3% in 2024. 

However, they said, the continued upward path of inflation was causing a loss of purchasing power and dampening consumer demand. 

Meanwhile, rising interest rates worsen financing conditions and were leading to a decline in investments.

Although inflation is likely to fall over the course of the year, the panel said, it will remain significantly higher — at an average of 6.6% in 2023.

The experts said they expected inflation of about 3% next year.

ECB warns of potential eurozone turmoil

The latest forecasts of the European Central Bank (ECB) lowered inflation projections and raised the growth outlook for this year.

However, ECB President Christine Lagarde on Wednesday said these predictions did not take into account recent upheaval in the banking sector, which could add to the eurozone's economic woes. 

The enforced UBS buyout of Swiss rival Credit Suisse — which followed the collapse of three regional US lenders — raised fears of a snowballing crisis in the banking sector.

"Those tensions have added new downside risks and have made the risk assessment blurrier," Lagarde said. 

The central bank chief added that policymakers were still focused on taming inflation, but refrained from committing to or ruling out further rises in interest rates. 

Edited by: Rob Turner

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