Cut off Russian energy supply would push Germany into recession, according to Bundesbank

The German central bank urges the ECB to tackle inflation through "decisive action"

MADRID, 10 Jun. (EUROPA PRESS) -

The Bundesbank, Germany's central bank, has warned that an escalation of the conflict in Ukraine, including a complete cut off of energy supplies from Russia, would have a profound impact on inflation and drag Europe's largest economy into recession, according to collects the entity in the adverse scenario of its macroeconomic picture.

Specifically, in the worst case scenario, the Bundesbank anticipates a slowdown in GDP growth in 2022, to 0.5%, while in 2023, when the Russian supply cut would have its greatest impact, German GDP would suffer a contraction of 3.2%, while for 2024 he is confident of a 4.3% rebound in activity.

As for prices, the institution's adverse scenario places harmonized inflation at 7.6% this year and 6.1% the next, while a year later it would reach 2.8%.

At the same time, in its base scenario, the Bundesbank has also revised upwards its inflation forecasts, which will reach an average of 7.1% in 2022, when in December it expected 3.6%, while it has substantially cut its projections GDP growth, up to 1.9% this year, compared to 4.2% in the previous projection, mainly as a result of the impact of the war in Ukraine.

Looking ahead to the next two years, the German central bank expects harmonized inflation to stand at 4.5% in 2023, compared to the forecast of 2.2% last December, while in 2024 prices will rise 2.6%, four tenths more than previously expected.

Likewise, regarding economic activity, the Bundesbank has revised downwards its previous GDP growth forecast, which in 2023 will be limited to 2.4% and 1.8% a year later, compared to previous forecasts of the 3.2% and 0.9%, respectively.

"The German economy is currently caught between opposing forces," notes the Bundesbank, which is confident that, as of the second half of 2022, expansionary forces resulting from the lifting of protection measures against the pandemic are likely to predominate, while it is to be expected that the prices of energy raw materials will drop somewhat and that the bottlenecks in supply will gradually be reduced, while external demand recovers.

At the same time, the entity considers it likely that households will spend at least part of the savings accumulated during the pandemic on consumption. Projections indicate that additional government spending on defense will provide further stimulus. However, exceptionally high inflation is expected to fuel uncertainty among consumers and erode their purchasing power.

As for the labor market, the Bundesbank expects it to remain on an upward trajectory, while employment growth weakens and the decline in unemployment slows. With regard to salary negotiation, the Bundesbank expects new noticeably higher salary agreements.

"Price pressures have even intensified again, which is not fully reflected in current projections," acknowledged Joachim Nagel, president of the Bundesbank, warning that "if this development continues, the average annual rate of inflation harmonized for 2022 could be considerably above 7%."

In this way, the German central banker considers that monetary policy "is called upon to reduce inflation through determined action."