FRANKFURT (Reuters) – Germany’s economy likely grew in the first quarter on the back of a rebound in industrial production, the Bundesbank said in its monthly report on Monday, reversing its earlier forecast of a mild contraction.

Germany has been struggling for most of 2022 due to the impact on its important industrial sector of rising energy prices, but a slight recovery is underway since gas prices fell.

“The German economy has been in better shape in the first quarter of 2023 than expected a month ago and activity is likely to have picked up somewhat,” the Bundesbank said. “The industry has recovered more strongly than expected.”

The central bank’s mild optimism is consistent with the results of several surveys suggesting a slight increase in gross domestic product although growth could remain below trend for some time.

Apart from lower gas prices, Europe’s largest economy is benefiting from improving bottlenecks in supply, automotive demand and also in construction.

Industrial orders have been rising recently, which could suggest the worst is over for demand for manufactured goods, the central bank said.

A tight labor market should also continue to support the economy and unemployment is expected to decline slightly in the coming month, the bank added.

But black spots remain because inflation is still weighing on consumption.

Nonetheless, price growth is expected to continue to moderate and even if core inflation remains elevated for some time, price inflation in services is expected to slow further, the Bundesbank added.

(Balazs Koranyi, Laetitia Volga, edited by Kate Entringer)

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