FRANKFURT (Reuters) – Inflation in Germany, the euro zone’s biggest economy, is likely to be higher than earlier thought while economic growth will be weaker with a recession next year now certain, the Bundesbank said on Friday in a biannual update of its economic forecasts.
The new forecasts mirror similar revisions on Thursday by the European Central Bank, which now sees inflation in the 19-country euro zone above its 2% target through 2025 and a shallow recession over the winter months.
For Germany, inflation is now seen at 7.2% in 2023, well above June projection for 4.5%, while the 2024 figure was raised to 4.1% from 2.6%. The initial forecast for 2025 was put at 2.8%.
“The risks to economic growth are tilted predominantly to the downside, mainly due to potential shortages in the supply of energy,” the Bundesbank said. “With regard to inflation, upside risks predominate.”
The growth forecasts also confirm that Germany is likely to be one of the weakest performers in the currency bloc next year, partly due to its excessive reliance on Russian natural gas.
In 2023, the economy is seen contracting by 0.5%, a big change compared to expectations for a 2.4% expansion seen in June. The 2024 growth forecast was cut to 1.7% from 1.8% while in 2025, growth is seen at 1.4%.
While gas shortages are not expected, the energy crisis will boost inflation, cut real disposable incomes and impede household consumption until at least mid-2023, the Bundesbank added. High energy prices will also weigh on production, especially in energy-intensive industries.
“From the second half of 2023 onwards, the German economy will gradually recover,” the Bundesbank said. “This is because foreign demand is expected to rise, uncertainty will abate, price pressures from energy commodities will diminish, and the rate of inflation will fall.”
(Reporting by Balazs Koranyi; editing by John Stonestreet)