‘The energy crisis is solved,’ the German economy is safe

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

The International Monetary Fund on Tuesday expected Germany’s GDP to contract 0.1% in 2023, becoming the second-worst performer among major economies behind the UK, before expanding 1.1% in 2024.

At the heart of concerns about Germany’s and the continent’s wider economic outlook over the past year is the potential for an energy crisis, as Europe tries to curb its dependence on Russian gas after Moscow’s full-scale invasion of Ukraine.

German output fell 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 is “more optimistic than the IMF” and does not see a recession this year.

“The German economy has been very tested in the last weeks and months, so the capacity for change in the German industry is very high, the energy crisis has been solved to a large extent. now over, and the outlook is good,” he told CNBC’s Joumanna Bercetche.

He said Germany’s progress in diversifying its liquefied natural gas supplies away from Russia, and its increased storage – thanks to built-in capacity during the mild winter – means the country’s economy is the ideal setting for the next cold season’s weather too.

The latest purchasing managers’ index readings available showed that German manufacturing, which accounts for about a fifth of the country’s economy, saw its biggest drop in activity for nearly three years in March and a hit its lowest level since May 2020.

However, Nagel said this was due to the lingering effects of the Covid-19 pandemic and Russia’s war in Ukraine, insisting that “we should 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 believe that they will overcome this, and go back to the levels that we saw before the pandemic,” he said.

Sticky core inflation

The European Central Bank increased interest rates by another 50 basis points in March to bring its key rate to 3%, as the continent grapples with high inflation.

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

Nagel said that the persistence of high core inflation indicated that the Governing Council of the ECB, in which he is considered one of the most astute members, has more to do in tightening monetary policy.

He expects headline inflation to eventually continue to decline, but reiterated that policymakers “need to be sensitive when it comes to the inflation story.”

“What is important to me as well, we have gone through uncertainty about financial market turmoil over the last five weeks and now we have to find out what the impact of that was, and we have to wait for the incoming data until we have the next item. meeting in May, and then we’ll see,” he said.

German banking ‘very strong’

Financial markets were rocked in March by concerns about the banking sector. The collapse of US-based Silicon Valley Bank early last month raised fears of an eventual contagion that brought down several US regional lenders and led to the emergency rescue of Credit Suisse by fellow Swiss giant UBS.

The ECB went ahead with a 50 basis point increase to interest rates despite concerns about the economic impact of the banking crisis, and Nagel hopes this sent an important message to markets.

“There is no contradiction between what we have to do in terms of price stability and the aspect of financial stability,” he said.

“We have different instruments to deal with price issues and financial stability issues, so it was an important message to participants in the financial market that we are very committed when it comes to fighting against inflation. “

Deutsche Bank shares sold off suddenly over a few days in March after a sudden spike in the cost of insurance against the norm. Analysts largely attributed this to misplaced market panic, but also to concerns about the German lender’s exposure to commercial real estate, which is considered a particularly weak link in the economy. SA.

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

“I think we have to be vigilant when it comes for example to the commercial banking sector, but let me take this opportunity to say something about the German banking sector – I think the banking sector is A very strong German,” he said.

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

Although he reiterated the ECB’s commitment to fighting inflation, Nagel admitted that policymakers “need to be careful” and monitor parts of the economy that could be affected. if rates continue to rise.

The European Commissioner for the Economy, Paulo Gentiloni, defended the strength of the European banking sector in general in an interview at the same event.

“We do not see a risk of systemic spillover in the EU system,” he told Joumanna Bercetche, referring to the pressures from US regional banks that have already contributed to the takeover of Credit Suisse by UBS .

However, he noted that the situation had to be monitored as it developed.

“At the moment, I don’t see any risk that this phenomenon could be brought into the EU. No risk at all … at the moment,” he said.

— CNBC’s Jenni Reid contributed to this report.