Bundesbank and Ifo Institute expect economic weakness

Status: December 17, 2021 1:02 p.m.

The Bundesbank is significantly lowering its forecast of economic growth. On the other hand, it expects inflation to be much higher than before. The Ifo index, which measures corporate sentiment, deteriorated for the sixth time in a row.

Both the Bundesbank’s new economic forecast and the current Ifo index indicate that economic development in Germany will continue to deteriorate in the coming months. The reasons given by the Bundesbank and the Ifo Institute are identical: on the one hand, it is the delivery bottlenecks that slow down the economy, and on the other hand, the corona pandemic remains the main factor behind repeated economic setbacks.

“The upswing is delayed somewhat,” said the outgoing Bundesbank President Jens Weidmann, explaining the assessment of the Bundesbank experts. In the current year, economists expect real GDP growth of 2.5 percent. In June they were still assuming an increase of 3.7 percent.

Private consumption as an economic factor

The old forecast cannot be held for the coming year either: an increase in economic output of 4.2 percent is expected for 2022. In June, the figure was still 5.2 percent. For 2023, however, optimism is growing that growth should be 3.2 percent. The experts had previously assumed 1.7 percent. The central bank is more optimistic for 2022 than many economic research institutes, who expect growth of less than four percent.

The Bundesbank economists assume that private consumption will pick up significantly from spring 2022. “For a while, consumers will spend more of their disposable income than they did before the pandemic,” Weidmann explained. In addition, the delivery bottlenecks should resolve by the end of 2022, which should temporarily give exports a strong boost.

In the short term, inflation is becoming longer term than expected

The forecast for the development of consumer prices has also been corrected: For this year the Bundesbank expects an inflation rate of 3.2 percent – measured by the harmonized consumer price index, which the European Central Bank (ECB) uses for its monetary policy in the euro area. That is 0.6 percentage points more than estimated in June. In the coming year, the Bundesbank believes that the average rate will not be 1.8 percent, as previously thought, but 3.6 percent.

Special effects such as the withdrawal of the temporary VAT reduction will then no longer apply. So far, many experts have pointed out that rising inflation is a short-term event driven by special phenomena.

“As in the euro area as a whole, the upside risks outweigh the inflation rate,” warned Weidmann. “Monetary policy should not ignore these risks and remain vigilant.”

The Bundesbank referred to the sharp rise in raw material prices for energy on the international markets. In addition, companies would pass higher costs on to consumers due to supply bottlenecks and expand profit margins when demand is strong. According to the Bundesbank, the inflation rate will fall again in 2023. At 2.2 percent, however, it will remain comparatively high in 2023 and 2024.

Germany’s most important economic barometer falls

The negative trend that the Bundesbank economists expect is also reflected in the current data from the Ifo Institute on the business climate. In December it fell surprisingly sharply by 1.9 points to 94.7 points compared to the previous month. After the sixth decline in a row, the indicator is now at its lowest level since February.

“The worsening pandemic is hitting consumer-related service providers and retailers hard,” Ifo President Clemens Fuest classifies the data. Accordingly, the business climate in the service sector and in retail deteriorated significantly. According to Fuest, the survey values ​​deteriorated especially in tourism and the hospitality industry.

The mood in the industry improved somewhat, but according to the Ifo Institute, the supply bottlenecks for preliminary products and raw materials have worsened. The cause of this is in part considerable tension in the international trade in goods, most of which can be traced back to the corona pandemic.

Andreas Scheuerle, economist at DekaBank, comments that from the companies’ point of view, the problems would gradually pile up in a wave that threatens to wash away growth: “Delivery bottlenecks, energy prices, the delta and now also the omicron variant of the corona virus – all of them Signs are currently pointing to a contraction in the gross domestic product. It is particularly sad that companies do not expect any improvement in the six-month horizon. Business expectations are as bad as in the euro debt crisis, “emphasizes Scheuerle.


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