Germany warned of stagflation threat as winter recession looms

‘The cuts in gas supplies from Russia and drastic price rises are wreaking havoc on economic recovery’

THE risk of stagflation in Germany is rising, a senior minister has warned, as forecasters predict a winter recession triggered by the energy crisis.

Florian Toncar, Germany’s deputy finance minister, said there was “an increasing risk of stagflation,” where growth flatlines but inflation soars, as Russia cuts gas supplies to Europe.

The comment came as Germany’s IFO Institute warned that the economy had ground to a halt and will go into reverse in the final months of the year.

The IFO predicts Germany’s economy will shrink by 0.2pc in the fourth quarter, followed by a deeper 0.4pc GDP fall in the opening months of 2023. That would qualify as a recession.

The economy is on track to grow by 1.6pc this year then shrink 0.3pc next year, the IFO said, as inflation rises from 8.1pc in 2022 to 9.3pc in 2023.

High prices and bills are battering household finances and limiting spending power, while high financing costs are set to hit the construction sector.

The IFO’S forecasts assume “no gas shortages during the winter, which would be followed by a rationing of gas supplies to manufacturing companies”.

Economist Mariana Monteiro, at Credit Suisse, said: “Germany may need to reduce gas consumption by up to 15pc versus usual levels to avoid shortages.” Europe is reeling from Russia’s weaponisation of fuel supplies, which has forced nations to draw up rationing plans for fear of shortages.

Timo Wollmershäuser, IFO’S head of forecasts, said it could take two years for the German economy to fully recover. He said: “The cuts in gas supplies from Russia over the summer and the drastic price increases they triggered are wreaking havoc on the economic recovery following the coronavirus. We don’t expect a return to normal until 2024, with 1.8pc growth and 2.5pc inflation.”

The Kremlin has ramped up inflationary pressure even more in recent weeks by cutting off flows through the Nord Stream 1 pipeline. Benchmark gas prices in Europe fell a further 9pc to their lowest level in a month yesterday. Prices slipped to €192 (£166) per megawatt hour, down 40pc on August.