In its monthly report, the Bundesbank ventures a gloomy outlook for the future.
(Photo: Reuters)
Berlin Because of the energy crisis, the Bundesbank is expecting a noticeable economic downturn and inflation of around ten percent. “There are increasing signs of a recession in the German economy in the sense of a clear, broad-based and prolonged decline in economic output,” the central bank said in its monthly report on Monday.
The main reason is the energy crisis as a result of the Ukraine war. After the mini-growth of 0.1 percent in spring, gross domestic product is expected to shrink somewhat in the current summer quarter.
“All in all, economic output is likely to decline noticeably in the fourth quarter,” emphasized the Bundesbank’s experts. “This should probably also apply to the first quarter of the coming year.” The outlook is extremely uncertain.
“The high inflation and the uncertainty with regard to the energy supply and its costs not only affect the gas and electricity-intensive industry and its export business and investments,” it said. Because private consumption and the service providers dependent on it are also affected.
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Annual inflation in the euro zone was at a record high of 9.1 percent in August and is likely to prompt the European Central Bank (ECB) to raise interest rates further. In Germany, the inflation rate climbed to 7.9 percent. With the expiry of the 9-euro ticket and the tank discount, a further boost can be expected in September, wrote the economists at the Bundesbank.
“This will lead to renewed price increases for energy and services in the current month and a corresponding increase in the inflation rate.” The measures announced in the latest relief package by the traffic light coalition, such as the gas levy or electricity price brake, would probably only be reflected in consumer prices at the beginning of 2023. “The bottom line inflation rate is likely to move into the double digits in the next few months.”
German financial institutions prepared for a sharp rise in interest rates
According to an analysis by the Bundesbank, German financial institutions are largely well prepared for an unexpectedly sharp rise in interest rates. According to the monthly report, the majority of institutes would therefore suffer only minor declines in the interest margin overall in the short term. In the medium term, a turnaround in interest rates should therefore have a noticeably positive impact on the interest margin of German banks across the board – also because rising market interest rates are unlikely to be fully passed on to depositors.
Nevertheless, the short-term effects on the interest margin of the individual banks are different. While in the analysis less than five percent of the credit banks and one third of the state banks have falling interest margins in the first year, the latter decrease in three quarters of the credit cooperatives and two thirds of the savings banks and around half of the remaining institutions.
“In the medium term, however, the interest margin of German institutions should benefit from an interest rate hike,” the Bundesbank said. Already in the second year after the interest rate increase, a good 90 percent and in the third year almost all institutes would show positive effects. The Bundesbank based its calculation on the so-called Basel interest rate shock scenario, which supervisors regularly use to measure banks’ interest rate risks.
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An abrupt rise in interest rates of 2.0 percentage points is simulated across all maturities. From this, the analysis determines the change in the interest margin of an institution in the first, second and third year after the interest rate increase.
According to the Bundesbank, interest rate risks represent a significant type of risk for many institutes. One reason for their emergence lies in the typical business structure: while credit customers are often interested in lending with a long-term fixed interest rate, depositors want to be able to access their money at short notice. In this way, the credit institutions are able to fulfill their economically desired task by converting short-term deposits into long-term loans.
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