German central bank predicts recession

The largest economy in Europe is set to contract for a “prolonged” time, according to the German central bank, as Russia restricts energy supply to the continent. The Bundesbank warned of a “broad-based and prolonged decline in economic output” in its monthly report, stating that “the signs of a recession for the German economy are multiplying.”

The “supply-side constraints,” or lower energy deliveries following Russia’s invasion of Ukraine, were most likely to blame for the slump. The Nord Stream pipeline has been stopped since the end of August by Moscow, which has reduced gas supply to Europe and put pressure on Germany’s economy.

With 55% of its gas coming from Russia at the start of the war, Germany was heavily dependent on Russian energy imports to run its industries and heat its houses. Between April and June, the German GDP increased marginally by 0.1%, but more and more economic indices, such as business and consumer confidence, are flashing warning signs.

According to the Bundesbank, the economy would probably contract “slightly” in the third quarter of the year before seeing a “marked” decline over the final three months of 2022 and the first three months of 2023.

It stated that the situation in the gas markets was “very tense” as a result of the Russian gas supply cutoff. Germany may “avoid formal rationing” of the fuel, but the central bank forecast that necessary reductions in consumption would force businesses to cap or halt production.

According to the Bundesbank’s “adverse scenario,” which predicted that the GDP would contract by 3.2 percent in 2023, the impact would probably be less severe. The Bundesbank noted that “the outlook is, however, extremely uncertain.”

Gas prices and energy costs have skyrocketed due to the decline in gas supply, driving inflation rates to levels not seen in decades. In August, consumer prices increased in Germany at a rate of 7.9 percent, significantly higher than the ECB’s goal rate of two percent.