A customer holds vegetables in his hand in a supermarket ©Adobe Stock / thebigland45

Monthly Report: First double-digit German inflation rate in 70 years – economy probably on brink of recession

According to the Bundesbank’s Monthly Report, the German economy is probably on the brink of a recession. The Bundesbank’s experts describe a significant, broad-based and sustained decline in economic output. The report states that persistent high inflation and uncertainty about energy supply and its costs are currently weighing heavily on the German economy. In particular, the gas supply situation will be stretched in the coming months owing to the lack of Russian deliveries. From today’s perspective, the economists explain that it is fairly unlikely that gas will be rationed. “High energy costs can have a similar effect, however, and lead to a decline in industrial production, in particular,” the experts write. This is consistent with pessimistic production plans and export expectations in this sector. Moreover, the considerable loss of purchasing power and households’ subdued mood for spending are likely to lead to a drop in private consumption and to spill over to consumer-related services. “Economic output could fall significantly overall in the fourth quarter of 2022 and first quarter of 2023," the experts conclude. The extent of the decline is extremely uncertain, however. Gas shortages, for example, would amplify the downward forces but these could be counteracted by the recently announced measures (depending on their design) taken by the Federal Government to curb the high gas and electricity prices.

Economic output could have remained more or less unchanged in the third quarter of 2022, the report states. According to data available up to August, industry and construction increased their output somewhat. Furthermore, the elimination of most coronavirus protective measures probably still provided positive stimuli in some services sectors. By contrast, price-adjusted sales in the retail sector declined somewhat. "In addition, economic output is likely to have fallen over the course of the quarter," the economists write. According to the report, there were already mounting signs of a slowdown in construction. "High construction prices, dampening of households’ purchasing power and increased financing costs are squeezing demand for construction services," the report states.

Double-digit inflation likely to persist

According to the Bundesbank’s experts, double-digit inflation in Germany is likely to persist over the next few months, even if several new relief measures come into effect, such as the reduction of the VAT rate on gas and district heating from October. Inflation will not necessarily be impacted by the government paying gas bills in December 2022. “This will depend on how government subsidies are paid to households and thus on how they are reflected in the official price measurement," the experts write. Inflation in Germany, as measured by the Harmonised Index of Consumer Prices (HICP), stood at 10.9% in September (August: 8.8%). "The exceptionally high price increases seen in the past few months at the upstream stages of the economy continued," according to the report. This was mainly due to sustained price pressures in the European energy markets. In comparison to the previous year, import prices rose by around 33% overall and prices of domestic products by around 46% in August. The experts mention that domestic prices for electricity and gas tripled, for example.