Because of the energy crisis: Bundesbank expects recession and double-digit inflation

Because of the energy crisis, the Bundesbank is expecting a noticeable economic downturn and around 10 percent inflation.

"There are increasing signs of a recession in the German economy in the sense of a clear, broad-based and prolonged decline in economic output," the central bank said in its monthly report on Monday.

The main reason is the rising energy costs as a result of the Ukraine war.

After the mini-growth of 0.1 percent in spring, gross domestic product is expected to shrink somewhat in the current summer quarter.

"All in all, economic output is likely to decline noticeably in the fourth quarter," emphasized the Bundesbank's experts.

"This should probably also apply to the first quarter of the coming year." The outlook is extremely uncertain.

"The high inflation and the uncertainty with regard to the energy supply and its costs not only affect the gas and electricity-intensive industry and its export business and investments," it said.

Because private consumption and the service providers dependent on it are also affected.

Setback for the hospitality industry

The German hospitality industry already started the second half of the year with a setback.

According to the Federal Statistical Office, hotels, restaurants and pubs counted 0.4 percent more in their coffers in July than in the previous month.

However, excluding rising prices, real sales fell by 1.5 percent.

This is the first drop since December 2021, when significantly less was taken due to the corona restrictions in force at the time.

Although sales in July were 10.2 percent higher than in the same month last year, adjusted for inflation, they were 9.3 percent below the result of July 2019, when the corona pandemic had not yet struck.

Annual inflation in the euro zone was at a record high of 9.1 percent in August and is likely to prompt the European Central Bank (ECB) to raise interest rates further.

In Germany, the inflation rate climbed to 7.9 percent.

With the expiry of the 9-euro ticket and the tank discount, a further boost can be expected in September, wrote the economists at the Bundesbank.

"This will lead to renewed price increases for energy and services in the current month and a corresponding increase in the inflation rate." The measures announced in the latest relief package by the traffic light coalition, such as the gas levy or electricity price brake, would probably only be reflected in consumer prices at the beginning of 2023.

“The bottom line is that the inflation rate should move into the double digits in the next few months.”

Canceled orders in housing construction

Expensive material and rising interest rates are meanwhile slowing down the tree boom and are increasingly causing orders to be canceled in residential construction.

In August, 11.6 percent of the companies surveyed were affected, after 11.5 percent in the previous month, according to a survey by the Munich Ifo Institute.

"Since April we have seen that a striking number of projects have been canceled," said Ifo researcher Felix Leiss.

"Explosive construction costs, rising interest rates on financing and limited funding options weigh heavily on the calculations of potential builders," said Leiss.

"Some projects become unprofitable as a result."

ECB Vice: Number of rate hikes open

After the recent sharp hike in interest rates, ECB Vice President Luis de Guindos has left the number of further hikes open.

These would depend on economic data, the Spaniard said on Monday at a banking conference in Madrid.

He reiterated that monetary policy always tries to fight inflation.

This will affect consumer spending and business investment.

The European Central Bank (ECB) heralded the turnaround in interest rates in July and followed this up with a strong tightening of its monetary policy at the beginning of the month.

After the most recent increase of 0.75 percentage points, the key interest rate is now at 1.25 percent.

ECB chief economist Philip Lane has signaled that the central bank will continue raising interest rates in the fight against rampant inflation well into next year.

The stock exchanges expect that the guardians of the euro will raise interest rates to more than 2.5 percent by next spring.