German growth will at best stagnate in Q1, Bundesbank warns

(Reuters) - Economic growth in Germany, the euro zone's biggest economy, will at best stagnate in the first quarter while inflation could slow noticeably at the start of the year, the Bundesbank said in a monthly economic report on Friday.

The German economy contracted by 0.3% in 2023 and weak demand for goods in its vast manufacturing sector are keeping the outlook muted, weighing on the entire 20-nation currency bloc.

"All in all, German economic performance could at best stagnate in the first quarter of 2024," the Bundesbank said.

External demand is weak, higher borrowing costs dampen investments, especially in residential construction, while uncertainty about the future direction of fiscal and climate policies are also weighing on activity, the central bank said.

While the labour market remains tight by historical standards, consumer remain cautious in spending, the bank added.

The euro zone is now in its sixth straight quarter of stagnating or negative growth, and the long expected recovery remains elusive.

A survey published by the European Central Bank on Friday sees the bloc expanding by just 0.6% this year, less than half of its potential growth.

The Bundesbank also said inflation could fall quickly at the start of the year, primarily on base effect, as high readings get knocked out of year earlier figures.

(Reporting by Balazs Koranyi; Editing by Angus MacSwan)