Europe’s biggest economy is on the brink of a winter recession

Germany is teetering on the brink of recession this winter as supply bottlenecks and a wave of new coronavirus cases hobble the economy.

Europe’s largest economy will shrink 0.5% in the fourth quarter of this year, compared with the third, and stagnate in the first three months of 2022, according to projections published Tuesday by the Ifo Institute for Economic Research. An economy is in recession when it contracts for two consecutive quarters.

“Ongoing supply bottlenecks and the fourth wave of the coronavirus are noticeably slowing down the German economy,” Timo Wollmersh?user, head of forecasts at Ifo, said in a statement. “The strong post-pandemic recovery that was originally expected for 2022 still hasn’t materialized.”

Growth is expected to pick up next summer as a wave of coronavirus cases subsides and supply bottlenecks ease, but the slow start to the year will cost the manufacturing powerhouse. Ifo slashed its growth forecast for 2022 by 1.4 percentage points to 3.7%.

With a large-scale election poster featuring a photo of Olaf Scholz, SPD candidate for Chancellor and Federal Minister of Finance, the SPD is advertising "12 · minimum wage" in front of its party headquarters, on August 11, 2021 in Berlin.

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Ifo expects inflation to increase by 3.1% this year and 3.3% in 2022, rates that far exceed the European Central Bank’s target of 2%. Consumer prices are not expected to return to normal until 2023, according to Ifo.

The dour outlook comes as countries around the world brace for a potential tidal wave of coronavirus cases caused by the Omicron variant, which could add pressure to stretched global supply chains and force central banks to rethink plans to withdraw support for the economy.

Last week, Germany recorded its highest number of daily deaths from Covid-19 since February, as it struggled to bring a fourth wave of the pandemic under control. Earlier this month, it banned unvaccinated people from accessing all but the most essential businesses, such as supermarkets and pharmacies, as part of new restrictions.

The International Energy Agency warned on Tuesday that a surge in cases would slow the recovery in global oil demand. The group downgraded its oil demand forecast by roughly 100,000 barrels per day for both 2021 and 2022, saying that air travel and jet fuel would be most affected.

View of the Christmas market on November 22, 2021, in Bielefeld, North Rhine-Westphalia. A 2G obligation applies to the Christmas market. Therefore, at the Bielefeld Christmas Market, wristbands are used, which entitle the guests to buy food and drinks. For this purpose, it must be proven beforehand whether one is fully vaccinated or has recovered.

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The price of Brent crude, the global benchmark, has dropped about $10 per barrel since the start of November to under $75. Still, the IEA said that the hit to the economy would be less severe than previous waves of the virus.

“New containment measures put in place to halt the spread of the virus are likely to have a more muted impact on the economy versus previous Covid waves, not least because of widespread vaccination campaigns,” the agency said in its monthly report for December.