Germany’s central bank, the Bundesbank, sees a recession in the country as likely, while it expects inflation to be on the rise and could peak above 10% this fall.
With its massive industry heavily dependent on Russian gas, Germany is among the most vulnerable to any disruption in energy supplies, and the increased costs are already putting more “pain” on production than expected.
“A decline in economic output in the winter months has become much more likely,” the central bank said in its monthly report.
“The high degree of uncertainty surrounding natural gas supplies this winter and the steep rise in prices are likely to significantly affect households and businesses,” it said.
Russia has cut gas exports in response to Western sanctions over the war in Ukraine, and many economists now see a German recession as inevitable.
High prices and gas shortages are already forcing Germany to curb consumption, with industries heavily dependent on energy, such as metals and fertilizer production, hit hard.
Energy costs will meanwhile continue to push inflation higher and are unlikely to peak before the autumn, around five times the ECB’s 2% target.
“Overall, inflation could reach 10% in the fall. The risk of an increase in inflation is high, especially in the event of a complete interruption of natural gas supplies from Russia,” the central bank said.
This then increases the risk of sharp wage increases, particularly given low unemployment, which could perpetuate high inflation through a spiral of wage increases, the Bundesbank warns.
Source: Capital
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