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The German recession will test the ECB’s monetary policy



The DAX is only a few percentage points away from its all-time high, but the crisis is far from over. In fact, it hasn’t even started, according to the Bundesbank. After the German economy contracted in the last quarter of 2022 by 0.4%, the economic outlook remains bleak. The latest monthly report from the Bundesbank warns that “economic output is likely to fall again in the first quarter of 2023 compared to the previous quarter,” and if these expectations come true, Germany will enter a technical recession. This situation will undoubtedly test the will of the ECB Governing Council in its plan to raise interest rates. Will Christine Lagarde hold the reins when the EU’s economic engine goes into cardiac arrest? Bundesbank President Joachim Nagel is still “significantly” raising interest rates. He indicated that core inflation, which excludes volatile energy and food prices, will remain at a very slight level after March, at the G20 meeting in Bangalore last Friday. “For this reason I do not rule out the possibility that the need for interest rate increases and large increases will continue beyond March,” he said there jointly with German Finance Minister Christian Lindner, and noted that the 10% and 12% wage requirements demanded by unions in various sectors of the German economy are a sign Clear on the second round inflation, who will remain. Besides the decline in external demand, it is precisely inflation that dominates the German economy and leads to a slowdown in private consumption, due to the decline in purchasing power. Moreover, the construction sector is suffering from higher interest rates and materials and further cooling is considered “very likely”. According to the Ifo institute, the general mood among German corporate executives remains steady as economic weakness persists. Ifo President Clemens Fuest confirms that companies are “less satisfied with current business than in January” and “are registering fewer new orders”. “There is no reason to be more confident,” the bank’s chief economist, Hook Offeuser Lambie, of Alexandrone, laments the war in Ukraine and the lack of fresh bad news, but despite the drop in supply-chaining material, the economy is not out of danger. Commerzbank chief economist Jörg Kramer is also cautious about the weakening of new business. “For an exporting country like Germany, an economic downturn is still likely, although it will not be a classic recession,” he limits the severity of the paralysis, and suggests it will be “The German economy will not be able to avoid a recession, but it will be moderate.” According to Wohlrabe, private consumption in particular is likely to weaken. Many car purchases have been brought forward until the end of 2022, while consumers now face much higher payments for energy “as a result consumption is likely to weaken.” The German Bundesbank is also concerned that Germany will run a higher public deficit “Overall, spending is likely to rise much faster than revenue,” says the report, “one contributing factor is that high inflation makes government purchases of goods and investments more expensive, among other things.” And German debt has its consequences. Already 40,000 million a year in interest on debt, a figure that will increase as the European Central Bank continues to tighten monetary policy. The Bundesbank also mentions that spending on defense and climate policy is likely to increase significantly, adding fuel to the fire. Adding all these factors, he makes his grim forecasts throughout the year. “Things could slowly improve as the year progresses. However, there is no appreciable improvement in sight,” says the central bank, which counts only on inflation falling “slightly” for the year as a whole, and a “slight drop” in GDP.

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