A recession in Germany, the euro zone's biggest economy, is increasingly likely and inflation will continue to accelerate and could peak at more than 10 per cent this autumn, the Bundesbank said in a monthly report on Monday.
With its oversized industry heavily exposed to Russian gas, Germany is among the most vulnerable to any cut off in energy supplies and soaring costs are already weighing on output with more pain expected.
"Declining economic output in the winter months has become much more likely," the central bank said. "The high degree of uncertainty over gas supplies this winter and the sharp price increases are likely to weigh heavily on households and companies."
Russia has been curtailing gas exports in response to Western sanctions over its war in Ukraine and many if not most economists now see a German recession as an inevitability.
High prices and a shortage of gas are already forcing Germany to curtail consumption, with energy intensive sectors from metal output to fertiliser production suffering heavily.
Energy costs will meanwhile keep pushing inflation higher and a peak is unlikely before the autumn at around five times the European Central Bank's 2 per cent target.
"Overall, the inflation rate could reach 10 per cent in autumn," the Bundesbank said. "The upside risk for inflation is high, in particular in the event of a complete stoppage of gas supplies from Russia."
This then raises the risk of rapid wage increases, especially given record low unemployment, which could perpetuate high inflation via a wage-price spiral, the Bundesbank warned.
The ECB raised interest rates from record lows last month to fight off inflationary pressure but further hikes are almost certain as the price growth outlook is failing to improve.
