According to the current issue of the Bundesbank’s Monthly Report, Germany’s economy remains in the grip of the Omicron variant. In contrast to previous waves of the pandemic, the services sector is unlikely to be the only one in which activity is being adversely affected by containment measures and social and physical distancing requirements. In fact, write the Bundesbank’s experts, working hours lost due to the pandemic could also be having a distinctly dampening effect on economic output – and in other sectors, too. As a result, German economic output is likely to decline again markedly in the first quarter of 2022, they explain.

Economic outlook only marginally less favourable than expected

However, the experts believe that the economic outlook is good. “In light of very robust demand, GDP is likely to rebound strongly in the second quarter, provided the pandemic subsides and the supply bottlenecks continue to ease,” they write. Positive effects are emanating from the industrial sector, with signs here of a further easing of supply bottlenecks, and demand for industrial products remaining high. Therefore, they continue, the economic outlook from today’s perspective appears only marginally less favourable than in the projections from December 2021, despite the greater pandemic-related burdens and the high inflation rate. While the growth rate of gross domestic product (GDP) is likely to be markedly lower in 2022, the fundamental upward trajectory of the German economy is not in doubt.

According to the report, the most recent wave of the pandemic has hardly left any mark on the labour market, with employment continuing to recover, and both unemployment and the use of short-time working arrangements having fallen substantially. “Leading indicators suggest only a comparatively mild dip in the labour market in the first quarter of 2022, despite the currently high infection rates”, the report reads.

Consumer prices continue to rise exceptionally sharply

Consumer price inflation in Germany rose strongly again at the beginning of 2022, and this despite the elimination of a one-off effect that had pushed up inflation in the second half of 2021. The Federal Government had lowered the VAT rate in the second half of 2020 for six months to cushion the economic impact of the coronavirus crisis and reinvigorate the economy. This increased the rate of inflation in the second half of 2021, as the rate shows the change in the consumer price index in relation to the previous year, when prices were considerably lower due to the VAT cut. However, despite the elimination of this VAT base effect, the inflation rate declined to only a comparatively small extent, namely from 5.7% in December to 5.1% in January, the experts write. Energy prices, in particular, picked up sharply owing to considerable price hikes for gas and electricity. Prices of other Harmonised Index of Consumer Prices (HICP) components also rose on a broad basis. As explained in the report, this is a trend that could continue: “In the coming months, inflationary pressures are likely to remain high, given the considerable price increases in upstream stages of the supply chain.” It states that price pressures on these stages are the result of pandemic-related supply bottlenecks, increased transport costs and higher commodity prices.

Rising consumer prices are not exclusive to Germany, the report continues. High energy prices have made a substantial contribution to the renewed rise in global consumer price inflation, which is indicative of broader-based inflation in many industrial countries. “This development was driven by buoyant demand coupled with high cost pressures initially resulting chiefly from price increases at the upstream production stages and for transport services,” the experts write, adding that some industrial countries were already experiencing accelerated wage growth. Against this backdrop, they continue, many central banks have tightened their monetary policy stance or at least considered doing so.

Economic effects of a higher minimum wage

The current issue of the Monthly Report also covers the potential economic effects of the planned rise in the statutory minimum wage to €12 per hour as from October 2022. It has stood at €9.82 per hour since 1 January 2022 and will increase to €10.45 as of July. “This political intervention in the wage-setting process would raise pay perceptibly in the lower wage brackets as well as having a marked impact on the wage brackets above,” the experts write. Their calculations suggest that this autumn’s wage increase will result in a 0.8% rise in the wage bill.

Although, based on historical relationships, the experts deem the probable macroeconomic impact of this increase to be manageable, it cannot be ruled out in the current environment of high inflation rates that increased wages will be passed through more strongly to prices. The calculations indicate that consumer prices will gradually climb on account of higher wage costs. On an annual average for 2024, they are likely to be around 0.15% above the baseline; after four years, they are expected to be approximately 0.25% higher. Here, the Bundesbank’s latest macroeconomic projections were used by the experts as a baseline. According to their calculations, GDP will initially rise slightly. However, this minimal positive effect, triggered by increased domestic demand, will soon be dampened as higher domestic production costs will reduce price competitiveness, causing exports to decline. This will counteract the positive effect.