The Bundesbank warned on Thursday that Germany faces rising inflationary pressure and a likely stagnation of economic growth in the second quarter, as higher fuel costs and the fallout from the Iran war weigh on domestic demand and corporate plans.
In its monthly report, the central bank said: "The inflation rate is likely to remain high in the coming months," adding that the rate "could rise further in Europe’s largest economy, depending on further developments in the Middle East." The Bundesbank highlighted that elevated energy costs are contributing to upward pressure on consumer prices.
Preliminary figures published last month showed German inflation at 2.9% in April, up from 2.8% in March. The Bundesbank noted that the increase was largely driven by a jump in oil and gas prices.
On the growth side, the report expected the economy to stagnate in the second quarter. The Bundesbank pointed to the effect of higher energy prices on private household demand and on companies' investment and production plans as the main channels through which activity could be constrained.
The federal economy ministry also issued a caution last week, saying that economic growth in Germany - which had expanded by just 0.3% in the first quarter - would likely suffer a significant hit from the consequences of the Iran war in the second quarter.
Context and implications
- Inflation has ticked up in April compared with March, with oil and gas price moves cited as a primary driver.
- The Bundesbank views the current geopolitical uncertainty tied to the Iran war as a potential amplifier of inflation and a drag on near-term growth.
- Household consumption and corporate investment and production are specifically highlighted as vulnerable to higher energy costs.
The Bundesbank's assessment frames the current outlook as one where price stability is under renewed pressure while growth momentum weakens. The combination of energy-driven inflation and the uncertainty stemming from conflict in the Middle East points to a period in which both consumers and firms may scale back spending and investment, according to the central bank's analysis.
Officials emphasised that future developments in the Middle East will be a key determinant of whether inflation continues to rise. For now, the central bank's message is one of caution: persistent inflationary pressure at a time when activity appears set to flatten.