Bundesbank expects inflation above 7 percent and weaker growth

Mon 13th Jun, 2022

Image by MoerschyAccording to the Bundesbank, the consequences of the war in Ukraine are slowing economic growth in Germany and driving up inflation. At 1.9 percent growth, the economic recovery should continue after the Corona low, as the Bundesbank forecast on Friday. In December, however, the central bank had still assumed that real gross domestic product (GDP) would increase by 4.2 percent in 2022.

The Bundesbank economists are now also much less optimistic for 2023, expecting economic growth of only 2.4 percent instead of 3.2 percent. Several institutes have lowered their economic forecasts following the Russian attack on Ukraine. Bundesbank experts also emphasize that uncertainty about future economic development is exceptionally high, primarily because of the Russian war of aggression.

On the one hand, prices for energy raw materials are expected to fall again somewhat and supply bottlenecks will gradually ease, the Bundesbank explained. At the same time, private households are likely to convert at least part of their savings accumulated during the Corona pandemic into consumption, thus boosting the economy. On the other hand, however, "the exceptionally high inflation is leading to uncertainty among consumers and weakening their purchasing power."

According to preliminary figures, the annual inflation rate in Germany jumped to 7.9 percent in May, the highest level in almost 50 years. For the year as a whole, the Bundesbank now expects an inflation rate of 7.1 percent measured by the so-called harmonized consumer price index (HICP), which the European Central Bank (ECB) uses for its monetary policy.

"Consumer prices will rise even more this year than they did in the early 1980s," explained Bundesbank President Joachim Nagel. He added that price pressure had even intensified recently, which the forecasts now presented do not fully reflect. "If this trend is continued, the HICP rate could average well over 7 percent for the year 2022."

From next year, the inflation rate in Germany is likely to fall gradually, according to estimates by the Bundesbank. The HICP rate could fall to 4.5 percent in 2023 and to 2.6 percent in 2024. The ECB is aiming for stable prices for the euro zone as a whole in the medium term at an inflation rate of 2.0 percent.

"The decline in inflation rates in the euro area will not be a foregone conclusion," Nagel stressed. "Monetary policy is called upon to bring inflation down through consistent action." On Thursday, the ECB had decided to end its multi-billion bond purchases on July 1 and to slightly raise key interest rates in the euro area for the first time in eleven years at its next meeting on July 21.

Image by Moerschy


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