German economy likely to shrink in the first quarter - Bundesbank

The German economy is likely to shrink in the current quarter, the Bundesbank said on Monday, before rebounding in the spring.

Publishing its monthly report, the federal bank said the new wave of Covid-19 infections had stopped people from going to work.

It noted: "German economic output is likely to decline again markedly in the first quarter of 2022. This is due to the resurgence of the pandemic, caused by the Omicron variant. In contrast to previous waves…the services sector is unlikely to be the only one in which activity is being adversely affected by containment measures and social and physical distancing requirements.

"In fact, working hours lost due to the pandemic could also be having a distinctly dampening effect on economic output, and in other sectors too."

Should the economy slow, it would be the second consecutive quarter of decline and technically put Germany into recession. GDP shrank by 0.7% in the final three months of 2021, after supply chain bottlenecks as well as the reintroduction of Covid-19 restrictions weighed heavily on the manufacturing-dependent economy.

However, the Bundesbank said the bottlenecks were now easing, which coupled with high demand, should lead to a rebound in spring.

"In light of very robust demand, GDP is likely to rebound strongly in the second quarter, provided the pandemic subsides and the supply bottlenecks continue to ease," it forecast.

The report coincided with separate data, also published on Monday, from Destatis, Germany’s Federal Statistics Office, showing that producer prices of industrial products had surged 25% in January, the fastest annual rate since modern records began in 1949.

Much of the rise was attributed to soaring energy costs, which were ahead 66.7% compared to January 2021. Natural gas prices surged 119%.

January’s increase in producer prices - which was ahead of analyst expectations - follows jumps of 24.2% in December and 19.2% in November.

Businesses are increasingly expected to pass on the higher costs to customers, fuelling consumer inflation.