Economic activity in Germany may have more or less stagnated in the first quarter of 2022, the Bundesbank’s economists write in the current issue of the Monthly Report. They expect Russia’s war of aggression against Ukraine to have had only a limited impact on Germany’s economy at first. Even so, the repercussions of the war are likely to significantly weaken the recovery, which had actually got off to a strong start. “Disruptions to foreign trade and supply chains, soaring energy prices and heightened uncertainty are burdening enterprises and households,” the report states.

Economic repercussions of the war of aggression probably limited at first

According to the ifo Institute’s survey, German enterprises’ assessment of the situation deteriorated only slightly in March, write the Bundesbank’s experts. The assessment of the situation remained stable, particularly among service providers, although it improved significantly in retail and even brightened substantially in the hotel and restaurant services sector. This was probably connected to the easing of the measures to contain the coronavirus pandemic. According to the report, this counteracted consumers’ tendency to tighten their purse strings due to high inflation and increased uncertainty. By contrast, enterprises in the manufacturing industry and the main construction sector viewed their business situation in a considerably gloomier light. The experts mainly put this down to a further significant worsening of bottlenecks in the supply of intermediate goods. This was particularly evident in the automotive sector, where production fell sharply in March according to data provided by the German Association of the Automotive Industry.

All things considered, the economists believe that economic activity in Germany may have more or less stagnated in the first quarter of 2022. According to the report, the supply bottlenecks in the industrial sector had probably eased slightly before the start of the war against Ukraine, with the construction sector also benefiting from the mild weather conditions. The report also states that price-adjusted retail sales edged up again slightly in February, having already recovered somewhat at the beginning of the year in the hotel and restaurant services sector from their sharp decline in December. The experts believe that the economic impact of the Omicron wave caused by higher than average levels of sick leave remained smaller than feared.

Recovery gets off to strong start but is significantly weakened by repercussions of war

The Bundesbank’s experts believe that the economic repercussions of the war are likely to significantly weaken the recovery, which had actually got off to a strong start. “Disruptions to foreign trade and supply chains, soaring energy prices and heightened uncertainty are weighing on enterprises and households,” the report states. Firms’ business expectations deteriorated substantially across all sectors in March, according to ifo Institute surveys. The decline in industry was particularly pronounced, with production plans and export expectations dropping sharply, too. However, the magnitude of the macroeconomic repercussions of the war in Ukraine remains very uncertain, and is dependent on how the situation evolves, the report states. In this report, the Bundesbank’s experts have dedicated a special article to discussing a potentially exacerbated risk scenario (see link).

Labour market charts positive course

According to the report, the labour market initially continued to chart a positive course in spite of the burdens entailed by the Omicron wave and the outbreak of war in Ukraine. However, the previously high pace of employment growth slowed markedly in February. The number of employed persons rose by 34,000 on the previous month in seasonally adjusted terms; an increase of just under half as many persons as in January. According to the experts, this almost put employment back at its level from the start of 2020.

Slight normalisation of crude oil and natural gas prices

Following a surge at the start of the war, commodity prices for energy have declined significantly over the past few weeks, yet remain high. This is partly attributable to the fact that energy supplies from Russia have thus far been disrupted to a lesser extent than initially feared, the economists write. The price of a barrel of Brent crude oil has averaged US$106 in April thus far; around 8% less than in the previous month but still significantly more than prior to the outbreak of the war. The same is true of European natural gas, with prices standing at approximately €106 per megawatt hour in April thus far. The experts believe that the prices of crude oil futures suggest a further stabilisation of prices.

Rise in consumer price inflation reaches new record high

Consumer prices as measured by the Harmonised Index of Consumer Prices (HICP) increased in March by a seasonally adjusted 2.5% on the month. According to the Monthly Report, this was the strongest rise seen in Germany since the introduction of the euro in 1999. At 7.6%, the year-on-year inflation rate also reached a new record high. The Bank’s experts write that inflation of this order was last seen during the First Gulf War, in 1981.

The renewed surge in inflation dynamics in March was attributable to energy, first and foremost. “At the consumer level, the extremely high rise in prices in this sector even exceeds the degree that can be explained by surging prices in the international commodity markets,” the economists note. Furthermore, the underlying trend increase in the prices of industrial goods, which was already considerable, has picked up speed. The same is true of food products, while momentum in the services sector has stabilised at a high level. With regard to the further development of consumer prices, the experts say it is too soon to give the all-clear: “Consumer price inflation could remain just as high over the next few months. However, this is dependent on how the war in Ukraine evolves, the supply bottlenecks associated with this situation and potential expansions of existing sanctions.”