Germany facing winter of stagflation as COVID, bottlenecks bite

  • Ifo institute slashed GDP growth forecast for 2022
  • Economy seen shrinking in Q4, stagnating in Q1
  • Zero growth coupled with unusually high inflation
  • Calls for ECB to end its pandemic emergency programme

BERLIN, Dec 14 (Reuters) - Persistent supply bottlenecks and a fourth wave of coronavirus infections in Germany are further delaying the recovery of Europe's largest economy from the pandemic, the Ifo institute said on Tuesday as it slashed its growth forecast for next year.

The Ifo institute expects the German economy to shrink by 0.5% quarter-on-quarter in the final three months of this year and to stagnate in the first three months of next year.

Coupled with the current surge in overall prices, Germany is now facing several winter months of zero growth and unusually high inflation, a combination described by economists as stagflation.

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For 2022 as a whole, Ifo slashed its economic growth forecast to 3.7% from 5.1% projected in September, and also confirmed its already reduced forecast of 2.5% for this year. For 2023 it lifted its growth forecast to 2.9% from 1.5%.

"The strong recovery initially expected for 2022 will be further pushed back," Ifo chief economist Timo Wollmershaeuser said.

INFLATION

The bleak outlook was shared by the economy ministry, which on Tuesday said in its monthly report that the government expected to see "rather weak" economic output in the final quarter of the year.

Activity in the services sector will likely slow as Germany faces renewed curbs aimed at breaking its fourth wave of COVID infections, while supply bottlenecks for microchips especially in the car industry hamstrung manufacturing, the ministry said.

However, in view of the high order backlog, the ministry had a positive outlook for German exports.

The inflation rate is seen rising further in the short term, reducing the purchasing power of German consumers in light of meagre wage growth so far.

Ifo expects the national consumer price index (CPI) to rise by 3.1% this year and by 3.3% next year - both rates clearly above the European Central Bank's price stability target of 2% for the euro zone as a whole.

"Rising costs associated with delivery bottlenecks play a driving role, as does the delayed adjustment to the increased energy and raw material prices," Wollmershaeuser said.

In 2023, Ifo expects inflation rate to slow to 1.8%.

Ifo head Clemens Fuest called on the ECB to announce an end to its Pandemic Emergency Purchase Programme (PEPP) at its regular meeting on Thursday.

"We have very strong signals from companies that significant price increases are imminent," Fuest said.

At their Dec. 16 Governing Council meeting ECB policymakers will debate options on how to adapt the bank's regular asset purchase programme (APP) once the much larger pandemic-fighting PEPP scheme ends in March.

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Reporting by Michael Nienaber Additional reporting by Miranda Murray and Reinhard Becker Editing by Paul Carrel and Gareth Jones

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