A recession in Germany, the euro zone’s biggest economy, is increasingly likely and inflation will continue to accelerate and could peak at more than 10% this autumn, the Bundesbank said in a monthly report on Monday.
With its oversized industry heavily exposed to Russian gas, Germany is among the most vulnerable to any cut off in energy supplies and soaring costs are already weighing on output with more pain expected.
“Declining economic output in the winter months has become much more likely,” the central bank said. “The high degree of uncertainty over gas supplies this winter and the sharp price increases are likely to weigh heavily on households and companies.”
Russia has been curtailing gas exports in response to Western sanctions over its war in Ukraine and many if not most economists now see a German recession as an inevitability.
High prices and a shortage of gas are already forcing Germany to curtail consumption, with energy intensive sectors from metal output to fertilizer production suffering heavily.
Energy costs will meanwhile keep pushing inflation higher and a peak is unlikely before the autumn at around five times the European Central Bank’s 2% target.
“Overall, the inflation rate could reach 10% in autumn,” the Bundesbank said. “The upside risk for inflation is high, in particular in the event of a complete stoppage of gas supplies from Russia.”
Wages are at risk of soaring as well, especially given record low unemployment, which could perpetuate high inflation via a wage-price spiral, the Bundesbank warned.
Although the ECB raised interest rates from record lows last month to fight off inflationary pressure, further hikes are almost certain as the price growth outlook is failing to improve.
The Bundesbank chief has warned that a possible recession will knock on Germany’s door if the energy crisis escalates, urging the European Central Bank (ECB) to continue increasing rates.
“If the energy crisis worsens, a recession seems likely next winter,” Joachim Nagel told German daily Rheinische Post in an interview published on Saturday.
“The German economy still performed quite well under difficult conditions in the first half of the year. However, if further delivery problems are added, for example, due to prolonged low water levels, the economic prospects for the second half would deteriorate further,” Nagel added.
He stressed that Germany’s inflation rate is “possible” to hit 10% in the autumn months and added that double-digit inflation rates were last measured in the country more than 70 years ago.
On his expectations about the ECB’s next interest rate decision on Sept. 8, he said: “Given high inflation, further interest-rate hikes must follow.”
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