Germany faces crashing into a recession and ‘noticeable’ decline – Central bank warning

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While many economies have rebounded from the pandemic as restrictions have eased Germany has struggled with ongoing supply chain issues disrupting its key manufacturing industry and Omicron also derailing growth over winter. In a monthly report issued today Germany’s central bank, the Bundesbank, warned the economy was likely to shrink further in the first quarter of this year, tipping the country into recession- defined as two consecutive quarters of negative growth. Germany already saw a fall in growth at the end of last year with the economy contracting by -0.7 percent in the final quarter. The Bundesbank said output was likely to “decline again noticeably”.

While supply chain issues are beginning to ease the central bank warned a new wave of Covid infections would continue to weigh on the economy.

The report explained: “Unlike in previous waves of the pandemic it is not just activity in the services sector that is likely affected by containment measures and behavioural changes.”

“Instead, pandemic-related absence from work is likely to dampen economic activity markedly also in other sectors.”

Data out today from the Organisation for Economic Co-operation and Development (OECD) showed Germany ending 2021 as the only G7 country with negative growth.

According to the OECD major European economies saw a marked slowdown in the final months of last year, although GDP growth remained relatively stable in the UK.

A snapshot of business recovery across Europe was also provided today by new data from IHS Markit’s Purchasing Managers’ Index (PMI), a closely followed survey of economic activity covering over 40 countries and regions.

The figures point to a more positive outlook for Germany with a PMI reading slightly above the rest of the Eurozone at 56.2, compared to 55.8.

Phil Smith, Economics Associate Director at IHS Markit, said: “The German economy continued to regain momentum in February following December’s brief stagnation in output growth.

“Overall activity rose the most since last August, driven this time by the services sector as manufacturing production increased more slowly than in January, when it had provided the main impetus.”

Despite the more immediate recession warnings the Bundesbank still predicted a longer term recovery for Germany, beginning in the spring if the pandemic subsides.

Oliver Rakau, Chief German Economist at Oxford Economics, told he was “surprised” by the Bundesbank’s recession predictions, adding that he thought Germany avoiding recession “is the more plausible scenario.”

He explained: “While the Bundesbank’s warning over infection-related work absences are very plausible indeed, I find little data in support of the notion that this had a big impact.

“Maybe more work from home and many contact-intensive services still being closed dampened the impact of the infection surge on labour supply.

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“The latest daily trucking activity also suggests that industry will be supportive of growth in Q1 and today’s PMI data also points to abating risks of a Q1 contraction.”

Today’s report from the Bundesbank also highlighted the ongoing problem of inflation for Germany, which the bank expects to remain high throughout the coming months.

The report added: “Against this background, many central banks tightened their monetary policy course or at least promised to do so”, in part reference to the Bank of England who are predicted to carry out a third hike in interest rates in March and the US Federal Reserve who are expected to raise interest rates several times this year.

Meanwhile, the European Central Bank has been slower act, previously suggesting rates would remain unchanged this year.

Bundesbank president Joachim Nagel recently said he was concerned about the impact of inflation, telling German paper Die Zeit “we have reached a textbook case for central bank action.”

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