German economy could shrink again in Q3, Bundesbank warns

FRANKFURT (Reuters) - The German economy could shrink again in the current quarter, given a deep industrial recession, subdued investment and abundant consumer caution, the Bundesbank said in a monthly economic report on Thursday.

The euro zone's biggest economy has recorded negative growth in two of the past three quarters, weighing on the broader region as its vast industrial sector struggles with poor export demand and high energy costs.

"The economy will stagnate or decline again in the third quarter," the central bank said. "However, a recession in the sense of a significant, broad-based and long-lasting decline in economic output is not to be expected at present."

Private consumption is likely to remain subdued for the time being, the central bank said, a puzzle for some economists since real wages are now rising and households are sitting on ample savings.

This increase in purchasing power should be reflected in private consumption but the Bundesbank expects consumers to continue holding back spending.

The prospects for industrial production are also likely to weaken this quarter, with short-term production plans and export expectations worsening, despite some tentative signs of recovery in new orders from abroad.

The labour market will, however, continue to buffer the economy.

Overall employment remains high, wages are rising and the outlook for the labour market is stable.

But the Bundesbank also noted some troubling signs in the labour markets.

The lack of an economic recovery is dampening firms' employment plans in some sectors and in manufacturing, larger layoffs are being prevented by greater use of a social insurance programme that allows employers to reduce working hours, instead of laying employees off.

(Reporting by Balazs Koranyi; Editing by Christina Fincher)

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