The Bundesbank’s experts see mounting signs of the German economy sliding into a recession. By this, they mean a significant, broad-based and sustained decline in economic output. According to the current issue of the Bundesbank’s Monthly Report, real gross domestic product (GDP) is likely to decrease somewhat in the current quarter and to shrink significantly in the final quarter of 2022 and the first quarter of 2023. The economists put this largely down to the extremely tight energy supply situation due to the Russian war against Ukraine. “High inflation and uncertainty regarding the supply of energy and its costs will affect not only gas and electricity-intensive industries and their export business and investment, but also private consumption and those service providers dependent on it,” the Bank’s experts explain.

Tight situation in the supply of gas

The Bundesbank expects the gas supply situation to remain extremely tight in the coming months. As things currently stand, though, it was just about possible to avoid formal steps towards rationing of gas thanks to larger deliveries from other countries and progress in energy efficiency and gas storage. “However, this will require a further, considerable reduction in gas consumption – especially among households.”

Economists expect a marked decline in economic output for both the fourth quarter of this year and the first quarter of 2022, although the outlook is extremely uncertain.

Drop in industrial output

High energy costs have weighed on the energy-intensive sectors, the experts write in the Monthly Report. Output in the chemical industries fell sharply, for example. Production of consumer goods also declined strongly, with furniture manufacturers and the pharmaceuticals industry being particularly affected. Industrial new orders continued to decline in July owing to falling domestic demand.

Construction output remained robust despite a sharp decline in demand and rose by 1½% on the month in July. At the same time, the Bundesbank sees signs of a deteriorating situation in the construction sector. According to the report, output in the main construction sector declined markedly and demand was considerably dampened by the massive increase in construction costs and prices, as well as the higher financing costs.

Labour market still resilient

The Bundesbank’s economists assess the labour market as still being resilient despite the deteriorating economic outlook. There was moderate employment growth in July, which was mainly due to the filling of jobs subject to social security contributions. At the same time, unemployment rose slightly by 0.1 percentage point to 5.5% in August due to the inclusion of Ukrainian refugees in the German social security system since June of this year. The economists expect unemployment to rise further in the coming months.

Inflation up again

The annual inflation rate as measured by the Harmonised Index of Consumer Prices rose to 8.8% in August, 0.3 percentage point higher than in July. This development was mainly fuelled by price increases for unprocessed food but the strong price dynamics likewise continued for processed food and for industrial goods and services, according to the Bundesbank’s experts.

Petrol and diesel prices soared upon the expiry of the €9 ticket and the fuel rebate on 1 September 2022, which, as the economists write in the report, will lead to further price increases in energy and services in the current month and a higher inflation rate. “By contrast, measures announced in the third relief package, such as the gas levy or the brake on electricity prices, will probably not be reflected in consumer prices until the beginning of next year. The inflation rate is likely to move into double-digit territory over the next few months overall.”