RECESSION in Germany, the largest economy in the eurozone, is becoming increasingly likely, while inflation will continue to accelerate and could peak this autumn – above 10 percent, the German central bank announced. With industry heavily reliant on Russian gas, Germany is among the most vulnerable European countries to any disruption in the supply of this energy source, and rising gas costs are already affecting production and are expected to get worse.

“A decline in economic output in the winter months has become much more likely. The high degree of uncertainty surrounding gas supplies this winter and the sharp increase in prices will likely weigh heavily on households and companies,” the report by the German central bank states.

The Russian gas company Gazprom announced that the delivery of Russian gas to Europe via the Nord Stream 1 pipeline will be interrupted for three days, from August 31 to September 2, due to “maintenance”. Russia is restricting gas exports in response to Western sanctions imposed because of the Russian-Ukrainian war. Many, if not most economists, now believe that a recession in that country is inevitable.

High prices, gas shortages…

High prices and gas shortages are already forcing the country to reduce consumption, with sectors dependent on energy sources, from metal production to fertilizer production, suffering severe consequences.

Energy costs will meanwhile continue to increase inflation, which could peak before autumn – slightly above 10 percent. This would put the inflation rate five times higher than the European Central Bank's (ECB) target of keeping the rate of price growth at 2 percent annually.

“Overall, the inflation rate could reach 10 percent in the autumn. The risk of rising inflation is high, especially in the event of a complete halt in gas supplies from Russia,” the Bundesbank said. This increases the risk of rapid wage growth, especially given record-low unemployment, which could prolong the period of high inflation through a wage-price spiral, the Bundesbank warned.

The ECB raised interest rates from record-low levels last month to combat inflationary pressure, but further increases are almost certain as the outlook for price growth is not improving.

Source: index.hr