Rising energy prices and costs have pushed the German economy to the brink of recession, and Europe’s engine losing economic momentum means more uncertainties for the continent’s economy.
With energy prices through the roof, inflation in Germany could hit more than 10 percent this year as the economy moves into recession, the country’s central bank, 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 and prolonged decline in economic output,” the monthly report said.
The institution’s researchers expect the German economy to contract sharply in the fourth quarter of this year and the first quarter of next year.
High inflation is the main cause of the economic downturn. Rising energy prices are weighing on the country’s energy-intensive industries, affecting private consumption and affecting service providers, the report said.
Chen Fengying, senior researcher on the global economy at the China Institutes of Contemporary International Relations, said the German economy has been hit harder by the impact of the Russia-Ukraine conflict than some other European countries because it has greater energy dependence on Russia.
“Russia, which accounts for more than 50 percent of German natural gas imports, recently stopped supplying Europe through the Nord Stream 1 pipeline,” she said. “The Nord Stream 2, in which Germany has invested a lot … has been suspended. So German energy prices have already risen sharply and the situation would get even worse when winter comes.”
To reduce the energy shortage, Germany has reinstated the use of coal-fired power plants and retains the option to resume operation of two nuclear power plants that would be shut down this year.
This comes after Germany recorded its first foreign trade deficit in more than three decades in May, pointing to structural challenges and bleak economic prospects.