Bundesbank says persistent inflation undermining German economy

 

BERLIN – The head of Germany’s central bank said that high inflation is dragging down the country’s economy, which is still struggling to fully recover from multiple crises over the last three years.

“The German economy is still wrestling with the consequences of high inflation.

This reduces the purchasing power of citizens,” Bundesbank President Joachim Nagel said on Friday as the central bank presented its latest economic forecasts.

Nagel said that, in the current year, the economy is slowly regaining its footing. The Bundesbank forecast that economic output in Germany will shrink by 0.3% for the year as a whole due to the decline in gross domestic product over the winter.

The short-term forecast is slightly more optimistic than it was in December, primarily because of the easing on the energy markets. At that time, the Bundesbank predicted that economic output would shrink by 0.5% in 2023.

Despite a recent decline in the inflation rate, the Bundesbank said that the so-called core rate – which excludes food and energy costs – remains stubbornly high.

“All in all, we expect economic growth of 1.2% and 1.3% in 2024 and 2025, respectively,” said Nagel.

That is a dimmer medium-term forecast for economic growth than the Bundesbank took in December, when it predicted growth in Europe’s largest economy of 1.7% in 2024 and 1.4% for 2025.

The Bundesbank expects overall inflation to fall from 8.7% in 2022 to 6% over the current year. In the next two years, the central bank forecast the rate of inflation – measured by the harmonized index of consumer prices (HICP), which is a key indicator for monetary policy in the eurozone – to fall to 3.1% in 2024 and 2.7% in 2025.

The European Central Bank (ECB) is aiming for an inflation rate of 2% in the common currency area in the medium term.

Bundesbank experts predicted that falling inflation, rising wages and a robust labour market will strengthen people’s purchasing power in the near future and that consumption, an important pillar of the economy, will increase.

However, moves by the ECB to tighten monetary policy of the ECB is leading to higher financing costs. The ECB on Thursday raised key interest rates for the eurozone for the eighth time in a row.

Higher interest rates are dampening private investment, particularly in residential construction, according to the Bundesbank.