In the Joint Economic Forecast, Germany’s government advisors warned of a contraction in the economy next year in case of a full halt in Russian natural gas imports. Inflation could also be pushed further the post-war record.
In the baseline scenarios, GDP is estimated to grow 2.7% in 2022 (revised down from fall report’s 4.8%), and 3.1% in 2023 (revised up from 1.9%). Inflation is forecast to hit 6.1% in 2022, highest number in 40 years, then slow to 2.8% in 2023.
However, in case of a Russian energy supply stop, GDP would growth only 1.9% in 2022, and then contract -2.2% in 2023. Inflation will rise further to 7.3% in 2022, a record-high in post-war Germany, then slow to 5% in 2023.
“If gas supplies were to be cut off, the German economy would undergo a sharp recession. In terms of economic policy, it would then be important to support marketable production structures without halting structural change. This change will accelerate for gas-intensive industries even without a boycott, as dependence on Russian supplies, which have been available at favorable prices up to now, is to be overcome quickly anyway,”Stefan Kooths, vice president of the Kiel Institute for the World Economy said.
“Policymakers should be careful not to provide poorly targeted transfers to cushion high energy prices. If such support schemes are handed out on a wide front, it will further drive up inflation and undermine the important signaling effect of higher energy prices. This in turn exacerbates the problems of low-income households and increases overall economic costs.”
Full release here.
ECB to turn more hawkish, EUR/CHF recovering
ECB is widely expected to keep monetary policy unchanged today. But with inflation at a record high of 7.5%, the central bank is also expected to sing a more hawkish tune. There should be an announcement to put a firm end date to the asset purchase program. Interest rate hike will only come “some time” after ending the purchases.
There are talks that putting an end date to asset purchases in June would open up the possibility of a rate hike in September, followed by another in December. But President Christine Lagarde will certainly continue to sound non-committal, but emphasize the importance of graduality, optionality and flexibility for the policy path ahead.
Here are some previews on ECB:
EUR/CHF’s reaction to ECB decision and press conference is worth some attention. So far, the decline from 1.0400 is not impulsive looking. The cross has also started to lose downside momentum as seen in 4 hour MACD. A break above 1.0204 minor resistance today will suggest that such pull back is finished. More importantly, in this case, rebound from 0.9970 is likely ready to resume through 1.0400. That, if happens, could give Euro a helping hand elsewhere.