Germany is increasingly likely to witness a recession with accelerating inflation, which could peak at more than 10% this autumn, according to the Bundesbank, the central bank of Germany.
The central bank said it in a monthly report recently noting that the high degree of uncertainty over gas supplies this winter and the sharp price rise are likely to weigh heavily on households and companies.
Moreover, as energy costs keep pushing inflation higher, a peak is unlikely before the autumn at around five times the European Central Bank’s 2% target.
“Declining economic output in the winter months has become much more likely,” the central bank said.
The likelihood of a recession is widely attributed to Russia curtailing gas exports to Germany in response to Western sanctions over Russia’s war in Ukraine.
The country is already forced to curtail consumption, with energy-intensive sectors suffering heavily.
According to the central bank, the upside risk for inflation is high, in particular in the event of a complete stoppage of gas supplies from Russia.
The bank also cautioned about resulting rapid wage hikes, especially given record low unemployment, which could perpetuate high inflation via a wage-price spiral.