The Bundesbank, Germany’s central bank, has revised downward its economic growth projections for the coming years, including a contraction in GDP of 0.5% in 2023, while it has raised its inflation expectations, which next year will reach 7.2%, as announced by the institution.

“Compared to the June projection, the GDP exchange rate for 2023 has been revised downwards considerably,” said Bundesbank President Joachim Nagel, for whom this is due to deteriorating energy supply conditions, a lower growth in external demand and higher financing costs.

Specifically, Germany’s central bank now expects the ‘European locomotive’ GDP to grow by 1.8% this year to record a contraction of 0.5% in 2023 and then rebound to 1.7% in 2024 and a 1.4% in 2025.

In this sense, the Bundesbank attributes the drop in economic activity expected until the middle of next year mainly to the energy crisis caused by the war in Ukraine, as well as the impact on household consumption of high inflation rates, while energy costs and weak foreign demand will also weigh on exports.

In addition, the Bundesbank expects that the high level of uncertainty and higher financing costs will depress business-to-business investment and in home construction, while as pandemic-related spending comes to an end, real government spending will too. will fall.

Regarding the evolution of prices, the Bundesbank forecasts that the harmonized inflation rate will stand at 8.6% in 2022 to moderate slightly to 7.2% in 2023 and 4.1% in 2024, while for 2025 anticipates that prices will rise by 2.8%, still well above the stability objective of the European Central Bank (ECB).

Likewise, the institution expects that core inflation, which excludes the impact of energy and food, will average 3.9% this year, but will increase to 4.3% in 2023, moderating to 2.9 % in 2024 and 2.6% a year later.

“Inflation will remain high, mainly due to the pressure that is expected from labor costs and persistently large profit margins,” warns the entity, which by 2024, in particular, anticipates that the end of the electricity price brake and gas will contribute to a high rate of general inflation.

In any case, the Bundesbank underlines that its projections remain subject to an unusually high degree of uncertainty, including the evolution of the war in Ukraine and the energy crisis, the consequences of government countermeasures and the impact of high inflation.

“Risks to economic growth are predominantly downward, mainly due to possible shortages in energy supply. Regarding inflation, upward risks predominate,” summarizes the German central bank.