A complete gas supply stop by Russia could slide Germany into recession in the coming year. The head of the IFO Institute, Clemens Fuest, considers a sharp increase in interest rates to be appropriate.
IFO boss Clemens Fuest sees the German economy heading for stagflation and, in the worst case, a recession. A phase of stagnating or even declining economic output coupled with high inflation is “very bad news,” he warned at the Association of Foreign Press in Germany (VAP) in Berlin.
It is a crisis of a lack of goods, which is particularly evident in the case of energy. But it also affects the value chains. Politicians can do much less in this situation than in the case of weak demand. Therefore, no more money should be spent in this situation, because increasing government spending would exacerbate the problem. At the same time, the European Central Bank should not hold back on interest rates. In his view, a sharp rise in interest rates would be appropriate.
Fuest referred to forecasts that Germany could slide into recession at the beginning of next year if there were a complete Russian gas ban: “I think that’s realistic.” In view of the upward pressure on prices, it is to be feared that in the autumn in the euro area and in Germany things will go in the direction of “double-digit inflation rates”. Inflation in the euro area climbed to a record 9.1 percent in August.
According to the head of the Bundesbank, Joachim Nagel, there is a risk that the phase of high inflation will last longer. He therefore sees a need for a strong interest rate hike by the ECB Council, which will decide on the key interest rate on Thursday. Several central bank heads of the euro countries had even campaigned to discuss an unusually large interest rate hike of 0.75 percentage points. Since the interest rate turnaround in July, the key interest rate in the euro area has been 0.50 percent.
“A recession in Germany will no longer be averted,” said Deutsche Bank boss Christian Sewing at a “Handelsblatt” congress. But the economy has enough resilience to overcome the recession. “We have to do everything we can to ensure that our cars, heating systems and factories don’t just run when an autocrat in the Kremlin favors us.”
