Germany’s economy is taking a breather but inflation isn’t, Bundesbank warns

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The new 100 and 200 Euro banknotes are presented at the headquarters of Germany's Federal reserve Bundesbank in Frankfurt

FRANKFURT (Reuters) – The German economy is taking “a breather” as a lack of goods and labour as well as new restrictions designed to fight the coronavirus pandemic put an end to its recent boom, the country’s central bank said on Monday.

The Bundesbank also warned that inflation in Europe’s largest economy was likely to stay well above 3% for some time and upcoming wage negotiations should deliver large increases.

Germany’s economy boomed in the first half of the year as services reopened for business. But it has since slowed as its industry was hit by supply disruptions and builders found it increasingly hard to find workers, the Bundesbank said.

This could be an ominous sign for the global economy given Germany’s crucial position in global supply chains and its role as Europe’s growth engine.

“The economic recovery will likely take a breather,” the Bundesbank said in its monthly report. “From today’s standpoint, GDP could tread water in the autumn quarter of 2021.”

The Bundesbank added inflation in Germany could come in just below 6% this month before easing next year as a 2020 VAT cut and other temporary factors fall out of the calculation.

Still, the German central bank saw consumer prices growing by well more than 3% for a long time, with core inflation — which strips out energy and food — substantially above 2%.

While wage talks yielded only small increases in the summer, actual earnings rose as workers who had seen their hours reduced due to the pandemic could increase them again.

New contracts also came with higher salaries.

“Macroeconomic conditions also point to stronger wage increases for collective bargaining agreements to be renewed in the near future,” the Bundesbank said.

The ECB has said that the current surge in inflation is temporary and should not be met with a tightening of its ultra-loose monetary policy, which includes a sub-zero interest rate on bank deposits and massive bond purchases.

But the Bundesbank’s outgoing President Jens Weidmann contradicted the ECB’ official line on Friday, warning of higher inflation expectations and wage growth.

(Reporting by Francesco Canepa, editing by Ed Osmond)

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