The German central bank on Friday upped its inflation prediction for 2022, and slashed its growth prediction for Europe's biggest economy by more than half.
The bank said the recovery after the COVID-19 pandemic was likely to continue, although this would be at a considerably more subdued pace than projected because of inflation. However, the Bundesbank experts also warned of an alternative scenario, in which an intensification of the war could lead to a significant dip in economic activity.
Figure could rise further
The bank's newest projection sees Germany's annual inflation rate jumping to 7.1% percent in 2022, up from a previous 5% prediction in March and 3.6% in December.
However, it warned the leap in prices could be even worse. "Inflation this year will be even stronger than it was at the beginning of the 1980s," Bundesbank President Joachim Nagel said. "Price pressures have even intensified again recently, which is not fully reflected in the present projections," he stressed, adding that the final rate could be well above 7%.
Nagel said inflation in Germany was likely to recede gradually from the start of next year. However, he added that this would not happen automatically for the eurozone area.
"Monetary policy is called upon to reduce inflation through resolute action," he said.
The European Central Bank yesterday said it would hike in interest rates in July, with further rises likely later in the year as monetary policy experts seek to squelch soaring inflation. Some have criticized the pace at which the European organization, also based in Frankfurt like the Bundesbank, is moving on the issue. The US Federal Reserve made its first first interest rate hike, which is expected to be one of several in quick succession, last month. The Bank of England has already raised rates multiple times since the winter.
What is the Bundesbank saying on growth?
The Bundesbank predicted growth in real gross domestic product (adjusted for inflation) in Germany of 1.9% this year, less than half of the 4.2% it predicted in December. Meanwhile, expected growth in 2023 was cut to 2.4% from 3.2%.
"Germany's economic recovery is therefore likely to continue, but at a considerably more subdued pace than projected last December," said the Bundesbank statement.
The bank said the recovery from the coronavirus pandemic and the impact of sharp inflation would act as opposing forces on the economy later in 2022.
It is expected that energy commodity prices would eventually start to fall, and supply bottlenecks would gradually ease, with foreign demand picking up again. But, the Bundesbank statement said, "exceptionally high inflation is expected to stoke uncertainty among consumers and will erode their purchasing power."
For 2024, the Bundesbank's forecasting predicted real gross domestic product growth of 1.8%. The growth predictions came under the proviso that the situation surrounding the Ukraine war did not worsen and see gas supplies from Russia completely stopped, with a warning from the experts.
"They stress that uncertainty about future economic developments is exceptionally high, mainly as a result of Russia's war of aggression on Ukraine."
"The baseline scenario of the projections builds on the assumption that the war and its consequences will not intensify any further. The Bundesbank has, in addition, calculated an alternative risk scenario which includes a cessation of Russian energy supplies. In this scenario, economic activity could experience a pronounced decline in 2023."
Edited by Mark Hallam