FRANKFURT, Germany – A recession in Germany, the eurozone’s biggest economy, is increasingly likely and inflation will continue to accelerate and could peak at more than 10% this autumn, the Bundesbank said in a monthly report on Monday, August 22.
With its oversized industry heavily exposed to Russian gas, Germany is among the most vulnerable to any cut-off in energy supplies and soaring costs are already weighing on output with more pain expected.
“Declining economic output in the winter months has become much more likely,” the central bank said. “The high degree of uncertainty over gas supplies this winter and the sharp price increases are likely to weigh heavily on households and companies.”
High prices and a shortage of gas are already forcing Germany to curtail consumption, with energy-intensive sectors from metal output to fertilizer production suffering heavily.
Energy costs will meanwhile keep pushing inflation higher and a peak is unlikely before the autumn at around five times the European Central Bank (ECB)’s 2% target.
“Overall, the inflation rate could reach 10% in autumn,” the Bundesbank said. “The upside risk for inflation is high, in particular in the event of a complete stoppage of gas supplies from Russia.”
This then raises the risk of rapid wage increases, especially given record low unemployment, which could perpetuate high inflation via a wage-price spiral, the Bundesbank warned.