The Bundesbank is ringing a “bell” for the German economy. As it points out in the Financial Stability Report, Germany’s economy faces deep challenges that could push for corporate insolvencies, keeping default risk higher next year.

Weak export demand, rising energy costs and rising wages are squeezing corporate margins, pushing the country’s vast industrial sector deep into recession.

“The German economy continues to face deep structural challenges that weigh on medium-term growth prospects,” the Bundesbank said.

This is likely to shake up the corporate sector, especially since overall earnings have been falling almost every quarter since the end of 2022, the central bank said.

“A significant number of corporate bankruptcies are likely to occur next year, given ongoing structural change and continued economic weakness,” the Bundesbank said.

Insolvencies may be exacerbated by higher interest rates, as refinancing needs will increase costs and could contribute to more defaults.

However, household finances should remain healthy as the labor market is robust and wages continue to rise, giving ordinary consumers a healthy financial buffer, the bank added.

Residential property prices have also stabilized and while properties are still somewhat overvalued, models suggest that the likelihood of a sudden drop in prices has decreased.

However, the outlook for commercial real estate is not so rosy.

“Commercial property prices did not fall further in the first half of 2024, but the risk of further significant price declines has increased compared to last year,” the Bundesbank added.