The energy crisis and the war in Ukraine are hitting the German economy hard. In its September report, the Federal Bank of Germany (Bundesbank) estimates that the recession will continue and the inflation rate may soon even reach double digits. And the Federation of German Industry (BDI) declares the probability of a “severe recession”.

Report of the Bundesbank

In its current monthly report, the Bundesbank warns of a prolonged recession in Germany, citing a “clear, broad and sustained decline in economic output”.

Real gross domestic product (GDP) is likely to decline modestly by the end of September and “shrink substantially” in the next two quarters.

Economic output will fall significantly in the final three months of this year, according to the monthly report: “This scenario is likely to continue into the first quarter of next year.”

According to the Bundesbank, the main reason is the extremely tense situation with energy supply due to Russia’s war against Ukraine:

“High inflation and uncertainty about the supply of energy, as well as the cost of the latter, affect not only the industry that consumes gas and electricity (…), but also private consumption and dependent service providers.”

“Severe recession”

A new quarterly report from the Federation of German Industry (BDI) says the industry is “likely to experience a severe recession in the next few months”.

The gas supply situation will remain “extremely tight” for the foreseeable future. Inflation is likely to “develop into double digits in the coming months,” the BDI report also said.

The labor market, however, “remains resilient.” Employment rose modestly in July, mainly thanks to employment through social security contributions.

The BDI explained that the sharp rise in fossil fuel prices and the weak euro had led to a significant deterioration in terms of trade. Weak exports and deteriorating foreign trade slow down GDP growth. In addition, the shortage of raw materials negatively affects industrial production, the BDI explained. Blockades have eased somewhat – but uncertainty is growing due to the war in Ukraine.

According to the BDI, a severe recession in an industry has ripple effects throughout the economy.

Economic research institutes such as the Ifo Institute in Munich and the Institute for the World Economy (IfW) in Kiel have also recently issued their forecasts of a sharp recession in Germany.