GDP minus expected: Bundesbank: wage agreements could drive inflation

The Bundesbank expects economic output to fall in the spring.

GDP minus expected: Bundesbank: wage agreements could drive inflation

The Bundesbank expects economic output to fall in the spring. At the same time, she sees the danger of high inflation becoming entrenched. High wage costs due to increasing collective agreements could fuel the price increase further.

According to the Bundesbank, the German economy will slide into recession in winter. "Economic output is likely to decline significantly in the current winter half-year," says the monthly report for November. With a view to companies, the Bundesbank lists the most important causes as the high degree of uncertainty in the energy supply and its costs, as well as falling private consumption as a result of inflation. In the third quarter, gross domestic product (GDP) surprisingly increased by 0.3 percent, mainly due to strong consumption and robust investments.

"The uncertainty about the energy supply and its costs is putting a heavy strain on companies. According to the latest autumn survey by the Association of German Chambers of Industry and Commerce, the majority of the companies surveyed saw energy and raw material prices as a business risk for the coming months," writes the Bundesbank. According to their estimates, the weakening of the global economy will be reflected in exports, even if the high order backlog and easing supply bottlenecks in industry cushioned the depressed demand somewhat.

The high inflation is also slowing down private consumption and thus activity in the consumer-related service sectors. “In addition, the pandemic-related state consumer spending is likely to gradually disappear. This means that state consumption will fall from the previously increased level,” the Bundesbank points out. After all, according to their assessment, the construction industry will continue to cool down.

With a view to inflation, the Bundesbank expects that this could "remain in the double digits beyond the turn of the year". "But it is still unclear to what extent it is reflected in the official price measurement and thus in the inflation rate." The annual inflation rate climbed to 10.4 percent in Germany in October. The Bundesbank now sees an increased risk of second-round effects. If inflation leads to higher collective wage agreements and thus wage costs, this can fuel inflation. So wages and prices would soar and inflation would solidify.

According to the Bundesbank, the most recent wage settlements have been increasingly strong. In addition, trade unions called for exceptionally high wage increases in view of the inflation. The Verdi union, for example, is demanding 10.5 percent more money for the public sector in the federal and local governments for a period of twelve months. It is not to be expected that these demands will actually lead to wage agreements of the same magnitude, wrote the central bank. "Even if that doesn't indicate an accelerated inflation development from the wage side, the risk of second-round effects has increased."