Germany Now Seen Dragging Euro Area Into Contraction Next Year

Article content

(Bloomberg) — The euro-area economy is expected to shrink next year as it battles surging energy costs and the risk of shortages following Russia’s invasion of Ukraine.

Article content

Output in the currency bloc will drop by 0.1% in 2023, according to economists polled by Bloomberg who were still predicting growth of 0.3% a month ago. Germany, the euro area’s largest economy, is seen contracting by 0.5% while France, Italy and Spain are expected to expand.

Article content

Germany’s strong reliance on Russian natural gas put it in a perilous position after war in broke out in Ukraine. With prices for energy and a growing range of goods jumping, consumers face a surging cost of living and business confidence is low. 

While the European Central Bank’s most-recent baseline forecasts see the economy avoiding two consecutive quarters of contraction, Vice President Luis de Guindos said in a newspaper interview published Friday that there’s a possibility of a “technical recession” amid elevated inflation. 

Article content

“The German economy will contract at least three quarters in a row until spring of 2023,” said Dennis Huchzermeier, a senior economist at the Handelsblatt Research Institute. “But it will be an atypical recession,” because demand for labor will remain high and manufacturers still have a large cushion of orders to work through, he said. 

Economists revised their predictions for price growth next year higher. Euro-area inflation is now seen averaging 5.5%, compared with 5% in the previous poll. Germany saw the largest upward revision among the bloc’s major economies. 

The ECB is expected to lift interest rates higher, with the deposit rate expected to reach a peak of 2.5% in the first quarter of next year. The first rate cut is expected to happen in the second quarter of 2024.