Bundesbank: War in Ukraine could slam brakes on German economy

Russia’s invasion of Ukraine could have knock-on effects on the German economy, slowing its growth potential and even potentially knocking it into recession at times this year, warns the country’s central bank.

“The effects of the Russian invasion on Ukraine should noticeably weigh on German activity in March,” reads the latest report from the Bundesbank, which looks at an economy that was just emerging from the effects of the coronavirus pandemic.

“The strong recovery expected for the second quarter could, from today’s viewpoint … turn out to be significantly weaker.”

The Bundesbank’s newest report says Europe’s biggest economy could “somewhat stagnate” in the first quarter. Other economists have already predicted a recession between January and March, which would put Germany in a technical recession since the final quarter of 2021 also logged an economic decline.

Two consecutive quarters of recession meets the definition of a technical recession.

That said, the bank noted that many companies had survived the most recent coronavirus wave relatively well and that shortages of raw materials were showing signs of letting up.

“But, because of the Russian invasion of Ukraine, the problems in the delivery chains could worsen already in March.”

That would be paired with an expected increase in energy prices. “This will likely dampen consumption by private households and production in energy-intensive industries.”

Recent sharp price increases are unlikely to fall back any time soon. “Because of the war in Ukraine, the inflation rate will probably climb in the next few months, which is mostly due to energy prices.”

Inflation rose in Germany again in February, surpassing the 5% mark: At 5.1%, consumer inflation was a jump on the same month a year ago. Petrol, gas and heating oil were the main contributors to the jump.

“Prices for food and industrial goods should also see increases due to the breakdown of wheat exports out of Ukraine and Russia as well as due to new delivery chain disruptions,” said the bank.