Low water levels threaten Germany's economic recovery

Germany's Bundesbank has struck a cautious tone in its latest monthly report, suggesting economic output growth in the third quarter is likely to be weak, if it materializes at all. The warning follows a drought caused by repeated heatwaves, which has dried up waterways across the country in recent weeks. Major rivers, including the Rhine, have recorded record-low water levels.

Freight transport disrupted

The low water levels are already restricting the transport of goods along inland waterways, leading to delivery delays, higher transport costs, and, in some cases, production stoppages. The Bundesbank warned this would put significant additional strain on the industrial sector, which had recently been gaining momentum.

Exports, which have been the main driver behind Germany's unexpectedly strong economic growth in recent months, are also at risk. The central bank noted that the boost provided by external demand is likely to be considerably constrained for the time being.

High energy prices and inflation

Persistently high energy prices continue to weigh on private consumption. Inflation rose to 2.8% in July after a temporary cut to the fuel excise tax expired. The Bundesbank expects inflation could rise further temporarily in the coming months.

First-half performance beats expectations

Despite the new challenges, Germany's economic performance in the first half of the year has outpaced expectations, given crises such as the war in Iran. Following 0.4% growth at the start of the year, gross domestic product rose by 0.2% quarter-on-quarter in the second quarter, according to preliminary data. The Bundesbank concluded that Germany's economy is now clearly on a path to recovery — one that even the war in the Middle East has failed to slow significantly.