“The energy crisis is resolved”, the German economy is safe

Germany’s energy worries are over and Europe’s biggest economy has the “inherent strength” to recover from the twin shocks of the pandemic and the war in Ukraine, according to Bundesbank President Joachim Nagel.

The International Monetary Fund predicted on Tuesday that German GDP would contract by 0.1% in 2023, becoming the second worst performer among major economies behind the United Kingdom, before expanding by 1.1% in 2024.

At the heart of concerns about the economic outlook for Germany and the wider continent over the past year has been the possibility of an energy crisis, as Europe strives to reduce its reliance on gas. Russian after Moscow’s full-scale invasion of Ukraine.

German production fell by 0.4% in the fourth quarter and is expected to contract again in the first quarter of 2023, entering a technical recession.

Nagel told CNBC on the sidelines of the IMF’s Spring Meetings that he’s “more positive than the IMF” and doesn’t see a recession this year.

“The German economy has proven a lot in the last weeks and months, so the adaptability of German industry is quite high, the energy crisis is more or less resolved. So we have had a very worrying situation in the past, but that is now over and the outlook is good,” he told CNBC’s Joumanna Bercetche.

He said Germany’s progress in diversifying its liquefied natural gas supply away from Russia and increasing its storage – resulting from capacity built up during the mild winter – meant the country’s economy was well placed. to also face the next cold season.

The latest available readings of the Purchasing Managers’ Index showed that German manufacturing, which accounts for around a fifth of the country’s economy, suffered its biggest drop in activity for nearly three years in March and hit its lowest level since May 2020.

However, Nagel claimed this was due to the lingering effects of the Covid-19 pandemic and Russia’s war in Ukraine, insisting that “we must not forget where we came from”.

“German industry has a good ability to deal with the situation, there is this inherent strength in the German economy, and I think it will overcome that, and return to the levels we saw before the pandemic,” he said.

Persistent underlying inflation

The European Central Bank raised interest rates a further 50 basis points in March to bring its key rate to 3% as the continent continues to struggle with high inflation.

Headline inflation in the Eurozone fell to 6.9% in March from 8.5% in February, driven by lower energy costs. But core inflation – which strips out volatile food, energy, alcohol and tobacco prices – rose to a record high of 5.7%.

Nagel said the persistence of high underlying inflation showed that the Governing Council of the ECB, in which he is considered one of the most hawkish members, had to go further in tightening policy. monetary.

He expects core inflation to eventually follow the headline figure lower, but reiterated that policymakers need to “remain really vigilant with regard to the evolution of inflation.”

“Also important to me, we have been through some uncertainty of financial market turbulence over the past five weeks and now we need to find out what the impact has been, and we need to wait for incoming data until what we have our next meeting in May, and then we will see,” he said.

The “very robust” German bank

Financial markets were shaken in March by worries about the banking sector. The collapse of US-based Silicon Valley Bank early last month sparked contagion fears that eventually brought down several US regional lenders and led to the emergency bailout of Credit Suisse by fellow Swiss giant UBS.

The ECB proceeded with a 50 basis point hike in interest rates despite concerns about the economic impact of the banking turmoil, and Nagel hopes this sent an important message to the markets.

“There is no contradiction between what we need to do on the price stability side and on the financial stability side,” he said.

“We have different instruments to solve price problems and financial stability problems, so it was an important message to financial market participants that we are very committed to the fight against inflation.”

German Bank shares sold off sharply within days in March after a surge in the cost of insuring against its default. Analysts largely attributed this to misplaced market panic, but also concerns over the German lender’s well-documented exposure to commercial real estate, which is seen as a particularly weak link in the US economy.

Nagel insisted that the German banking system is safe and sound.

“I think we have to be vigilant with regard to, for example, the commercial banking sector, but let me take this opportunity to say something about the German banking sector – I think the German banking sector is very robust,” said he declared.

“I think, compared to 15 years ago, they are much better capitalized, have a better liquidity situation, so I have no doubts.”

Although he reaffirmed the ECB’s commitment to fighting inflation, Nagel acknowledged that policymakers “have to be careful” and keep an eye on the parts of the economy that could be affected if rates continue to fall. ‘increase.