Germany: Inflation and War Interrupt Recovery of German Economy

The German economy continues to be hit hard by the war in Ukraine and the Chinese corona crisis. At the same time, both crises are driving inflation. Globally, too, there are signs of subdued economic development, from which Germany, as an export-oriented economy, is likely to be noticeably affected. The difficult environment is weighing on the German economy, which is nevertheless proving robust. However gross domestic product will probably stagnate at best in the second quarter.

The Ukraine war and the lockdown in China are weighing particularly heavily on the German industry, which continues to suffer from a severe shortage of intermediate products and raw materials. The production backlog continues, so that the high order backlog can only be processed sluggishly. The bottlenecks in international supply chains, which have existed since the pandemic, are only easing slowly and are also keeping inflation high.

Services are currently still benefiting from the easing of the Corona protection measures, which are stimulating tourism and gastronomy in particular. However, this recovery process is gradually petering out. However, high inflation is significantly reducing household purchasing power. The relief packages are only likely to dampen inflation somewhat temporarily. Decisive for the economy and inflation at the moment are the further course of the war in Ukraine and the Chinese pandemic policy.

In 2022, I only expect a growth rate for GDP of 1.2 percent followed by 1.4 percent in 2023.  I think that inflation will remain high at 7.5 percent on average this year. Next year, inflation will probably decrease to 2.7 percent.

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