German Bundesbank: Strong Upturn Seen in 2Q Despite Supply Constraints

21 June 2021

By David Barwick – FRANKFURT (Econostream) – The service sector is expected to drive a strong economic upturn in the current quarter in Germany despite supply constraints, the German Bundesbank said on Monday in its latest monthly bulletin.

‘Economic output in Germany is expected to rise strongly again in spring 2021 after the setback in the first quarter’, the German central bank said, which ‘is mainly attributable to the service sector.’

At the same time, supply constraints, particularly for primary products like semiconductors, are hampering production and ‘are likely to dampen industrial production in the coming months as well’, the bulletin said. ‘Material shortages for intermediate products such as wood, steel and insulation materials have also been increasingly reported in the construction industry’, it said.

Still, the Bundesbank noted, citing Ifo economic research institute, German industry generally remains optimistic. ‘This suggests that the burdens caused by the supply bottlenecks will be limited’, it said.

Although June HICP would moderate after the acceleration of previous months, July would see the return of ‘significantly higher inflation rates’, according to the Bundesbank. This was due to the base effect associated with last year’s temporary reduction of the value added tax, offset somewhat until October by the pandemic-related adjustment of HICP measurement, it said.

‘From today's perspective, rates around 4 % are possible in the short term when this weakening effect expires at the end of the year’, the central bank said.

The Bundesbank sounded a positive note with respect to the German labour market in the light of the successful containment of the pandemic.

‘The indicators of willingness to hire increasingly show that a recovery in the labour market is expected in the near future’, the bulletin said, with unemployment set to ‘fall rapidly in the next three months.’