In its Monthly Report, the Bundesbank writes that the German economy is likely to have pretty much stagnated in the second quarter of 2022. Although the elimination of most coronavirus mitigation measures lent a strong boost to services, which had previously been constrained, and the attendant consumption expenditure, the high inflation was a drag on households’ purchasing power. Moreover, gloomy consumer sentiment, owing to uncertainty about future economic developments, was reflected in sharply lower retail and motor vehicle sales. The consumer climate index calculated by the market research institute GfK dropped to a record low. Shortages of materials and labour weighed on activity in the construction sector.

According to the Bundesbank, supply bottlenecks, high uncertainty and diminishing demand have eroded industrial production. As a result, the Bank’s experts write, industry was probably unable to keep production at first-quarter levels. The considerable cutbacks in Russian gas deliveries since June were a major drag on enterprises and households. For that reason, in particular, the Bundesbank expects GDP growth in the current quarter to be somewhat weaker than projected in June 2022.

Weak employment growth

The Bundesbank writes that seasonally adjusted employment growth in May, in which the number of persons in employment increased by 35,000, was once again down on the previous month. This is likely to have been due, amongst other things, to the increasing strains from the war on Ukraine and – partly in connection with the war – the high energy prices as well as the supply bottlenecks for intermediate goods. Some services sectors, moreover, were finding it increasingly difficult to fill vacancies.

The experts noted that, after falling almost steadily for two years, registered unemployment rose sharply in June. The number of unemployed persons was up by 133,000 to 2.42 million in seasonally adjusted terms, while the unemployment rate rose by 0.3 percentage point to 5.3%. The incorporation of Ukrainian refugees into the social security system with effect from June is the primary explanation provided by the experts. However, the rather weak upturn in spring is also likely to have played a role. Looking at leading indicators, the Bundesbank tends to expect unemployment to rise further in the coming months.

Inflation rate drops slightly in June due to temporary relief package

According to the Monthly Report, the inflation rate recently abated to some degree. Inflation measured by the Harmonised Index of Consumer Prices (HICP) came to 8.2% on the year in June, which was somewhat less than the increase recorded in May. This was mainly due to the temporary significant reduction in local public transport prices caused by the introduction of the €9 ticket.

Although energy prices continued to rise very sharply, price pressures did not increase any further owing, amongst other factors, to the temporary fuel rebate. By contrast, food price inflation continued to pick up strongly, and industrial goods inflation remained elevated. The Bundesbank continues to expect high inflation rates in the coming months. Inflation could even increase again in September, as the temporary relief measures will have then expired. However, according to the report, the future trajectory of the energy commodity markets is very uncertain, especially with regard to natural gas deliveries from Russia. Risks to price developments remained tilted to the upside.