The German national debt increased by 62 billion euros to 2.62 trillion euros in 2023. At the same time it is The national debt ratio, that is, the national debt in relation to nominal gross domestic product (GDP), fell from 66.1 to 63.7 percent. The significant difference between high nominal growth – not adjusted for prices – and last year's real growth (-0.3 percent) can be explained by inflation. Although fewer goods and services were produced in Germany, their prices increased significantly. In this way, public debt ratios can be significantly reduced during longer periods of rising inflation.especially since the state's tax revenues are nominal and therefore also increase with rising inflation.

The German economy has likely bottomed out with negative growth expected in the first quarter. Both the ifo business climate and the ZEW economic expectations recently showed slightly improved future expectations. Additionally, global trade volume increased slightly for the first time in January compared to a year earlier, which should benefit industrial production going forward. However, the data also shows that, apart from corona-related spikes, global trade growth has been significantly weaker since 2018, because rising global protectionism, supply chain disruptions and geopolitical conflicts are making it difficult the international division of labor. This trend is unlikely to reverse in the short term, which is why The transformation of the German economy, which is heavily focused on export-oriented industry, is even more urgent.

Private consumer spending should rise soon

So far, private consumption has failed to support the German economy. In view of the ever-present uncertainties, especially political ones, Germans are saving more instead of planning larger purchases. However, it can be assumed that confidence will increase with the onset of spring and the rise in real incomes. High wage agreements with significantly falling inflation at the same time. – will increase in the future and, therefore, private consumer spending will increase.

The inflation rate in Germany fell to 2.2 percent in March, once again higher than expected. Inflation rates are also falling in the eurozone. While nominal inflation fell to 2.4 percent and the ECB's target zone of 2 percent is expected to be reached during the second quarter, the base inflation rate – excluding the energy and food components – remains high at 2.9 percent. Wage-induced service price increases are the main driving force here. If the effects of price-based inflation reduction disappear from the second half of 2024 when comparing current energy prices with the highest levels of the previous year, inflation rates can be expected to rise again . In this context, the ECB is likely to decide its first interest rate cut in June., which could be followed by two or three additional small interest rate increases of 0.25 percentage points each. However, it will continue to adjust its monetary policy stance based on data, that is, with reference to current growth and inflation figures.

Are three US interest rate hikes in 2024 too optimistic?

In the US, the latest ISM Purchasing Managers' Indices show an expansion in production for both the services sector and, for the first time since early 2022, the manufacturing sector. The growth dynamics are likely to remain correspondingly high, also because the labor market and therefore private consumption should remain stable.. The employment components of the ISM indices suggest only a slight increase in unemployment in the coming months, meaning that rising wages will keep inflationary pressure higher than in the eurozone. In this context, the expectation of up to three key interest rate cuts by the US Federal Reserve may be too high.

In many emerging countries, purchasing managers' indices have already risen more strongly and indicate an economic recovery. Furthermore, inflation rates are falling in many countries. Some central banks in emerging countries have already lowered key interest rates.

The attractiveness of stocks is increasing

Interest rate developments are likely to continue to play an important role in capital markets. In addition to short-term interest rates falling as central banks become less restrictive, government bond yields are also likely to decline for the time being. This increases the attractiveness of precious metals, stocks and crypto assets, although many positive market expectations have already been discounted.