German economy on point of recession due to Covid restrictions, says central bank

The Bundesbank said on Monday the latest wave of the coronavirus pandemic risked pushing the German economy - Europe's largest - into a technical recession before staging a recovery from the second quarter.

German economy on point of recession due to Covid restrictions, says central bank
The headquarters of the Bundesbank in Frankfurt. Photo: dpa | Arne Dedert

After gross domestic product shrank by 0.7 percent in the last quarter of 2021, “overall economic output could again sink noticeably in the first
quarter of 2022, before picking up speed again in the spring,” the German central bank said in its monthly economic report.

Pandemic restrictions were mostly to blame for the drop, the Bundesbank said, with measures “hitting some service-sector branches hard”.

Manufacturing, meanwhile, continued to report “serious” problems with a lack of raw materials and components, as well as a shortage of labour.

“The pick-up in industrial production, however, suggested a certain easing” in the supply situation at the end of 2021, the central bank said.

A recession is technically defined as two consecutive quarters of economic contraction.

Germany’s European neighbours have seen their economies recover more strongly from the initial impact of the pandemic.

Germany registered 2.8 percent growth in 2021, while France surged ahead with growth of seven percent.

The spread of the Omicron variant in Germany led to a record number of infections at the start of the year.

The government has said it will start to roll back health restrictions as the cases begin to ebb, with most rules lifted by the end of March under the plan.

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Germany slashes growth forecasts amid Ukraine war

Germany on Wednesday slashed its economic growth forecast for 2022 as consumer prices continued to rise steeply amid the war in Ukraine.

Germany slashes growth forecasts amid Ukraine war

The gross domestic product of Europe’s biggest economy is now expected to expand by 2.2 percent rather than 3.6 percent projected in January, the economy ministry said.

Inflation was meanwhile expected to jump to 6.1 percent for the year, “a rate seen only at times of the oil crisis or shortly after German reunification” in 1990.

Germany is “paying a price” for its backing of Ukraine against Russia’s unprovoked aggression, said Economy Minister Robert Habeck.

“We must also be ready to pay this price,” said the minister, noting that Germany was “paying through higher energy prices, through higher inflation and a slower growth”.

“This literally means that Germany will be poorer compared to the forecasts from three or four months ago.”

Berlin had previously pinned its hopes on a firm recovery for 2022 as the impact of the coronavirus pandemic begins easing.

But Russia’s aggression in Ukraine has laid waste to those plans. Instead, it has further exacerbated supply chain woes and pushed up prices of daily necessities.

Energy prices in particular have leapt since war broke out, forcing the first German companies to take drastic action like idling their plants while consumers are faced with hefty power bills.

READ ALSO: Russian gas stop promises ‘sharp recession’ for Germany

Energy threat

Germany, which is highly dependant on energy from Russia, was also facing a real threat of its gas supplies being cut off.

Russia’s Gazprom turned off its gas taps to Poland and Bulgaria earlier Wednesday over their refusal to meet Russian President Vladimir Putin’s demand for payment in rubles.

An immediate end to Russian gas imports would send Germany into a “sharp recession” next year, the country’s leading economic institutes said in a forecast published in mid-April.

“This has to be taken seriously,” Habeck said on Wednesday, stressing that Germany would continue to make its payments in euros or dollars in line with its European partners.

Converting payments into rubles is the responsibility of Gazprom, he said, acknowledging that there was some uncertainty around how Russia “will
interpret and apply” its recent decree on gas payments.

Habeck also said Germany had managed to start weaning itself off Russian coal and oil faster than expected in response to the war.

The share of crude oil imported from Russia has fallen from 35 percent before the conflict to around 12 percent, meaning a European embargo on Russian oil would be “manageable”, he said.

“This does not mean that an embargo would not significantly increase prices and that there would not be localised supply disruptions… but it would no longer lead to a national economic disaster,” Habeck said.

Berlin has also managed to reduce its gas imports from Russia to 35 percent, compared with 55 percent before the conflict, he said.

However, he said it was “not realistic” for Germany to completely ban Russian gas before next year, given the new infrastructure needed to diversify gas imports.