The Bundesbank expects an economic slump in Germany and persistently high inflation in the coming months. Despite the surprising economic growth in the summer quarter, a further recession is to be expected in the winter half-year, the central bank wrote in its monthly report published on Wednesday.
Higher labor costs can fuel inflation
“The inflation rate could remain in double digits beyond the turn of the year.” The takeover of the gas advance payment by the state in December will relieve consumers. “But it is still unclear to what extent it is reflected in the official price measurement and thus in the inflation rate.”
The annual inflation rate climbed to 10.4 percent in Germany in October. The Bundesbank now sees an increased risk of second-round effects. If inflation leads to higher collective wage agreements and thus wage costs, this can fuel inflation. So wages and prices would soar and inflation would solidify.
According to the Bundesbank, the most recent wage settlements have been increasingly strong. In addition, trade unions called for exceptionally high wage increases in view of the inflation. The Verdi union, for example, is demanding 10.5 percent more money for the public sector in the federal and local governments for a period of twelve months. It is not to be expected that these demands will actually lead to wage agreements of the same magnitude, wrote the central bank. “Even if that doesn’t indicate an accelerated inflation development from the wage side, the risk of second-round effects has increased.”
Uncertainty in energy supply
According to the economists, economic development in Germany is being slowed down, among other things, by the uncertainty about the energy supply and the increased energy prices. That puts a heavy strain on companies. The weakening of the global economy is likely to be reflected in exports, and inflation is dampening private consumption. In addition, the construction industry is likely to continue to cool down. However, the extent of the expected recession is extremely uncertain.
According to preliminary figures, Europe’s largest economy surprisingly grew by 0.3 percent in the third quarter compared to the previous quarter. The Federal Statistical Office plans to announce details on Friday.
