Hamburg port at dusk

War in Ukraine, supply bottlenecks and inflation weighing on German economy

The German economy grew slightly in the first quarter of 2022, the Bundesbank’s Monthly Report states. According to the Federal Statistical Office’s flash estimate, real gross domestic product (GDP) rose by 0.2% in seasonally adjusted terms. However, the effects of Russia’s war on Ukraine have been weighing considerably on the German economy since the start of the conflict, according to the Bundesbank’s economists. They report that supply bottlenecks in industry and construction have intensified again and high energy prices have further dampened output. The latter also pushed up the already high level of inflation, which reduced households’ purchasing power and thus weighed on private consumption. Exports of goods had also fallen significantly in the first quarter of 2022, with a sharp drop in exports to euro area countries, in particular, probably partly on account of the fairly weak pace of growth in the euro area.

High inflation and uncertainty are slowing recovery

At most, the Bundesbank expects economic output to grow slightly this spring. Opposing forces are at work here: “Headwinds are coming, in particular, from the high level of inflation, supply bottlenecks, high uncertainty and weaker foreign demand.” This is being counterbalanced by the extensive easing of coronavirus mitigation measures, which is likely to boost consumption. “On balance, from today's perspective, these upward forces are likely to be the dominant force by a slight margin at best,” the report continues. Business sentiment has deteriorated significantly compared with the first quarter, the Bundesbank writes, referring to the ifo business climate index. Sentiment in the construction and manufacturing sectors has seen an especially sharp downturn, due, in particular, to significantly increased material shortages. The Bundesbank economists report that the order situation in industry is still good.

Steep rise in consumer prices

According to the Bundesbank, consumer prices rose sharply again at the beginning of the year. In the first quarter of 2022, the inflation rate increased significantly year on year from 5.4% to 6.1%, according to the Monthly Report. Energy prices, in particular, but also food and non-energy industrial goods, had driven up inflation. In April, inflation rose to 7.8%. Similarly high rates were last observed in the former West Germany during the first Gulf War at the beginning of the 1980s. The Bundesbank expects the inflation rate to initially rise slightly further and then decline only moderately. In view of the war in Ukraine and pandemic-related supply bottlenecks, producer prices for consumer goods and food rose sharply in the period under review. This is likely to make industrial goods and food more expensive for consumers, too. Government relief measures in the areas of fuel, electricity and local public transport can be expected to temporarily dampen the price increases somewhat. “Overall, from today’s perspective, the inflation rate is still likely to be around 7% on average this year,” the Bundesbank writes. However, the price outlook is currently particularly uncertain.

Unemployment falls to pre-crisis level

“The labour market developed exceptionally favourably in the first quarter of 2022,” the economists write. They report that the number of persons in employment rose sharply in the first two months of the year, exceeding the previous peak employment level seen in early 2020 for the first time in March. Unemployment also returned to pre-crisis levels, the report states. The number of unemployed persons stood at 2.29 million in April 2022, putting the seasonally adjusted unemployment rate at 5.0%. By contrast, cyclical short-time work and probably also hours worked per employee had not yet returned to pre-crisis levels.