Soaring energy prices and spending have pushed Germany’s economy to the brink of recession, and Europe’s slowing economic engine means more uncertainty for the continent’s economy.
With soaring energy prices, inflation in Germany could top 10 percent this year and push the economy into recession, the country’s central bank, the Bundesbank, said in a report on Monday.
“There are increasing signs of a recession in the German economy in the sense of a clear, broad-based and sustained decline in economic output,” says the monthly report.
The institute’s researchers expect the German economy to contract significantly in the fourth quarter of this year and in the first quarter of next year.
High inflation was the main reason for the economic downturn. Soaring energy prices are weighing on the country’s energy-intensive industries, eroding private consumption and affecting service providers, the report said.
Chen Fengying, senior researcher on world economy at the China Institute of Contemporary International Relations, said the German economy has been harder hit by the impact of the Russia-Ukraine conflict than some other European countries because it has greater energy dependency on Russia.
“Russia, which accounts for more than 50 percent of Germany’s natural gas imports, recently stopped its supplies to Europe via the Nord Stream 1 pipeline,” she said. “The Nord Stream 2, in which Germany has invested a lot … has been suspended. Therefore, energy prices in Germany have already risen sharply and the situation would get worse when winter approaches.”
To alleviate energy shortages, Germany has resumed the use of coal-fired power plants and is holding the option to reactivate two nuclear power plants that were scheduled to shut down this year.
This comes after Germany posted its first trade deficit in more than three decades in May, pointing to structural challenges and a bleak economic outlook.
“As the engine of European economic development, Germany’s flagging growth will inevitably drag down the entire European economy,” Chen said. She added that Germany’s economy was robust in the earlier European debt crisis and had become a stabilizer for the euro zone. But this time, Europe could be on the brink of recession.
According to Eurostat, inflation in the 19-nation euro zone hit a record 9.1 percent in August, while food and energy prices continued to rise. In order to reduce inflation in the euro zone, the European Central Bank has already raised its key interest rates twice this year, and further increases are likely.
Zheng Chunrong, head of the Germany Research Institute at Tongji University in Shanghai, said the COVID-19 pandemic has damaged the global economy and supply chain, and the export-oriented German economy has been badly affected by the global economic environment. Economic recovery through green and digital transformation is much slower than expected, he said.
“Germany has participated in the sanctions against Russia that have damaged its own economy, especially energy supplies,” he said, adding that soaring energy prices will drive up German companies’ costs and weaken their competitiveness.
“There are discussions in Germany that the country could fall into an economic recession, which is possible,” he said.
Thousands of people gathered in the Belgian capital of Brussels on Wednesday for a “national day of action” to protest skyrocketing electricity, natural gas and food prices. A Belgian media poll this week found that 64 percent of respondents are concerned they may not be able to pay their electricity and gas bills, which have more than doubled in the last year.
Agencies contributed to this story.