Germany's Federal Bank President's Assessment: What's the True State of Germany's Economy?
In a significant development, Bundesbank President Joachim Nagel has called for the European Central Bank (ECB) to continue its interest rate hiking course to combat inflation, despite concerns about a potential recession in Germany.
Nagel's advocacy comes as the ECB has already significantly increased the key interest rate for the second time, following the Federal Reserve's decision to raise interest rates by 75 basis points yesterday to combat inflation. The inflation rate in Germany currently stands at around 10.7 percent, a figure that Nagel attributes as a key factor contributing to Germany's economic struggles.
The key factors contributing to the potential recession in Germany, as highlighted by Nagel, include weak domestic demand, a strengthening euro currency, and the resulting erosion of export competitiveness. Germany, being the largest economy in the Eurozone and heavily reliant on exports, is particularly vulnerable to these dynamics.
Nagel's stance aligns with that of the American central bank, the Fed, as both institutions aim to achieve a medium-term inflation rate of 2 percent. The ECB must remain on its interest rate hiking course to achieve its inflation target, according to Nagel.
However, some resilience remains in the labor market with positive real wage growth and stable employment projections, which may cushion the slowdown to an extent. Despite this, both consumer and corporate sentiment have taken a hit, with households less willing and able to spend, affecting consumption, which accounts for about two-thirds of Germany’s economic activity.
In a discussion round held in Madrid, Nagel concluded that Germany's economy is not doing well and sees a certain probability that Germany will slip into a technical recession. He also suggested reducing the ECB's balance sheet, which has increased significantly during the pandemic, as a measure to combat inflation.
The economic picture was changed significantly due to Russia's war in Ukraine at the beginning of the year, and the effects of the conflict are still being felt today. The International Monetary Fund (IMF) projects a third consecutive year of stagnation for Germany's economy, underscoring the risk of a recession possibly being "slight" but significant.
The statements were reported by Reuters. Nagel's stance on further interest rate hikes was not provided in this paragraph, leaving room for further discussions and decisions by the ECB in the coming months.
The European Central Bank (ECB) must continue its interest rate hiking course, as suggested by Bundesbank President Joachim Nagel, to combat inflation and achieve its inflation target, aligning with the stance of the American central bank, the Fed. Nagel also proposed reducing the ECB's balance sheet, which has increased significantly during the pandemic, as a measure to combat inflation.
