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German economy likely to shrink before new bounce, Bundesbank says

Credit: REUTERS/POOL

The German economy is likely to shrink this quarter because of tighter pandemic-related restrictions, then recover in the spring as coronavirus infections fall and vaccines are distributed, the central bank said on Monday.

FRANKFURT, Feb 22 (Reuters) - The German economy is likely to shrink this quarter because of tighter pandemic-related restrictions, then recover in the spring as coronavirus infections fall and vaccines are distributed, the central bank said on Monday.

The Bundesbank also played down a rebound in inflation, which it blamed mainly on changes in the price index, and it noted salary increases were moderate.

The German government has been criticised for its relatively slow pace of vaccinations, and businesses have been increasingly impatient for an easing of the lockdown, now in its fourth month, especially with case numbers falling.

"German economic output is expected to shrink noticeably in the first quarter of 2021 but to return to a significantly higher level from the spring," the Bundesbank said in its monthly report.

It added the contraction in the three months to March was likely to be more shallow than this time last year, as construction and industry continue to grow and other businesses adapt to the pandemic-related restrictions.

The Bundesbank said a stronger-than-expected bounce in German inflation - which hit 1.6% in January after -0.7% in December - was mainly caused by value-added tax hike and changes in the index that reflect last year's lockdown.

Specifically, food and industrial goods have gained weight at the expense of packaged holidays and clothes. The Bundesbank expected further temporary effects in the coming months for the same reason.

The Bundesbank noted that collective wages actually paid out fell last year, as many employees were put on short-time work.

For this year, the most recent negotiation resulted in a pay increase of just 1.1% for the textile industry. The minimum wage was increased by 1.6% to 9.50 per hour, with another 1.1% increase scheduled for July.

Property prices rose 7% to 11%, according to different surveys, and remained 15% to 30% over-valued in the large cities, the Bundesbank added.

(Reporting By Francesco Canepa, editing by Larry King)

((francesco.canepa@thomsonreuters.com; 004906975651247; Reuters Messaging: francesco.canepa.thomsonreuters.com@reuters.net))

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