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Outlook for winter increasingly gloomy

Economic output in Germany stagnated in spring 2022. According to the Federal Statistical Office’s flash report, seasonally adjusted real gross domestic product (GDP) stagnated in the second quarter compared with the previous quarter. The economy was caught between opposing forces in the second quarter, the economists write in the Bundesbank's latest Monthly Report. On the demand side, the economy was buoyed mainly by private consumption. The elimination of coronavirus mitigation measures went hand in hand with a strong increase in consumer spending on services to which access had previously been restricted, the Bank’s experts write. Exports also provided a boost, noted the economists. Business investment in new machinery and equipment is likely to have risen only marginally at most owing to the high level of uncertainty and supply bottlenecks. Construction investment is likely to have fallen sharply, however.

Uncertainties and high inflation weigh on outlook

According to the current assessment, German economic output in the third quarter is therefore likely to more or less stagnate again. The economists write that catch-up and backlog effects in the use of previously restricted services will probably bolster private consumption in the third quarter as well. However, high price increases are further reducing households' purchasing power and concerns about a looming shortage of gas in the winter are weighing on consumer sentiment, the experts explain. The consumer climate index calculated by the market research institute GfK recently dropped to a record low, with a clear deterioration being seen once again in income and economic expectations, in particular.

High energy prices and concerns about a gas shortage also had an impact on enterprises. The Ifo business climate index declined significantly in July compared with the second quarter. Business expectations saw a particularly steep fall and were the lowest they had been since April 2020, the experts explain. However, according to the current issue of the Monthly Report, the most recent data suggest that industry and foreign trade have withstood the negative factors to date.

According to the experts, economic developments in Germany will be affected in the third quarter and beyond by unfavourable developments in the gas market. Therefore, the economists believe that the probability of GDP declining in the approaching fourth quarter of 2022 and the first quarter of 2023 has increased considerably.

The economic strains also made themselves felt on the labour market. The labour market’s rapid catch-up process lost considerable momentum in the second quarter following the lifting of pandemic restrictions, according to the report. Even so, employment continued to rise. Only relatively minor use of short-time working was still being made at this point and unemployment went up considerably from the beginning of June 2022. This was, however, due solely to the fact that Ukrainian refugees were included in German social security legislation. Positive expectations for future developments have been pared back, write the experts.

Inflation rate continues to rise

The exceptionally strong rise in seasonally adjusted harmonised consumer prices (HICP) continued into the second quarter, according to the Bundesbank’s latest Monthly Report. Energy prices went up as crude oil prices continued to increase. The latter had risen even more sharply in euro terms as a result of the marked depreciation against the US dollar, the Bundesbank's experts explained. This development obscured the temporary reduction in fuel taxes (fuel rebate). The lower tax rates were introduced as part of the three-month relief package as of June and were probably also passed on to end customers for the most part, the report states. Furthermore, electricity and gas tariffs were again raised significantly in the second quarter. Although the cost of services continued to rise markedly up to May, prices declined distinctly in June. According to the Bundesbank, this is due to the introduction of the €9 ticket as part of the relief package. Overall, despite the relief package, the average inflation rate remained very high in the second quarter. The sharp rise in prices continued in July. Food prices, in particular, continued to climb very sharply.

The economists expect new records for the inflation rate in the autumn, with another marked rise expected once the measures contained in the relief package expire in September. According to the report, the increase in the general statutory minimum wage and the depreciation of the euro will bring additional cost pressures in the coming months. In addition, a levy on gas tariffs is to be introduced in October, while the VAT rate on gas is to be lowered at the same time. The inflation rate could climb up to around 10% in the autumn, the experts write. However, the inflation outlook remains extremely uncertain, due notably to the unclear situation on the commodity markets, although the Bundesbank believes that price risks are still tilted to the upside at present.