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Friday, December 3, 2021

Bundesbank warns German economy is taking a breather but inflation is not

Frankfurt. The German economy is taking a “breather” as shortages of goods and labor, as well as new restrictions designed to tackle the coronavirus pandemic, have 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 is likely to remain well above 3 percent for some time and the upcoming wage talks should lead to a significant increase.

The German economy grew sharply in the first half of the year as services resumed. But it has slowed since then as its industry has suffered from supply disruptions and it has become increasingly difficult for builders to find workers, the Bundesbank said.

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

“The economic recovery is likely to take a breather,” says the Bundesbank’s monthly report. “From today’s perspective, GDP could hit water in the fall quarter of 2021.”

The Bundesbank added that inflation in Germany could be just below 6 percent this month and then decline next year as VAT cuts in 2020 and other temporary factors are dropped.

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However, Germany’s central bank has seen consumer prices rise more than 3 percent for a long time, and core inflation, which deprives energy and food, was well above 2 percent.

While the wage negotiations in the summer yielded only modest increases, actual wages rose as workers whose working hours were cut by the pandemic could increase them again.

New contracts with higher salaries were also awarded.

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

The ECB said the current surge in inflation is temporary and should not be met by tightening its ultra-soft monetary policy, which includes negative interest rates on bank deposits and massive bond purchases.

But outgoing Bundesbank President Jens Weidmann on Friday ran counter to the ECB’s official line, warning of higher inflation expectations and wage increases.

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