The economic situation in the first quarter of 2022 before the invasion was initially better than expected despite the Omicron wave, the Bundesbank writes in its current Monthly Report. Retail sales and turnover in the hotel and restaurant sector recovered slightly from the steep decline in December. Furthermore, materials shortages receded further, which led to a rise in industrial output, with continued high demand also playing a part. According to the ifo Institute, sentiment in the German economy brightened on a broad basis in January and February and the containment measures against the pandemic were gradually eased.

Significantly weaker recovery expected in second quarter

“The impact of Russia’s attack on Ukraine is likely to place a noticeable strain on economic activity in Germany from March,” the report continues, however. Supply chain problems are likely to intensify again. Furthermore, energy commodity prices have surged, which will probably put a damper on household consumption and the production of energy-intensive industries. The situation is being further compounded by looming disruptions to foreign trade and heightened uncertainty. “From today’s perspective, the strong recovery expected for the second quarter is likely to turn out considerably weaker,” the experts write. The magnitude of the repercussions of the conflict are very uncertain, however, and dependent on how the situation evolves.

Employment up substantially at beginning of year

The positive development on the labour market was not noticeably hampered by the Omicron wave at the beginning of the year. “After seasonal adjustment, employment in fact expanded very substantially in January,” the Bank’s experts say. With an increase of 80,000 persons on the previous month, the rise was somewhat stronger than in the second half of 2021. After seasonal adjustment, registered unemployment continued its marked decline in February, down by 33,000 persons. “The unemployment rate dropped by 0.1 percentage point to 5.0% and thus returned to its very low pre-crisis level,” the Bundesbank writes.

Surge in crude oil and natural gas prices

According to the Bundesbank, the rise in international crude oil prices, evident for some time now, surged once again from the end of February following Russia’s invasion of Ukraine. The price for a barrel of Brent crude oil stood at US$134 for a time and thus over 37% higher than before 24 February 2022. Prices have come down slightly since, standing at US$111 as this report went to press. Following a peak of more than €240, prices for natural gas recently stood at €105 and were thus 22% higher than the level before the war began.

Inflation rate continues to climb in February

Consumer prices as measured by the Harmonised Index of Consumer Prices (HICP) rose again substantially by 0.6% in February compared with the previous month. The Russian invasion did not yet play a role, however, as prices are usually collected in the first three weeks of a month, the experts explain. The inflation rate was up by 5.5% on the year and thus 0.4 percentage point higher than in January. Higher inflation was evident in all the components with the exception of services. “Due to the war in Ukraine, the inflation rate is likely to continue to edge slightly upwards in the next few months,” write the Bundesbank’s experts. However, it is particularly difficult to assess how energy markets will develop in future. It is also expected that prices for food and industrial goods will additionally be driven upwards as a result of the slump in wheat exports from Ukraine and Russia and new disruptions to supply chains.