Germany Is in a Sharp Recession, and the U.K. Might Soon Join the Club Thanks to Bank of England Hike
Key takeaways
- Sticky inflation is running rampant across Europe
- German recession is set to be worse than previously estimated, with the Ifo Institute cutting the country’s GDP growth prediction to 1.5%
- The U.K. is in crisis mode as inflation worsens and Bank of England raises interest rates by half a point
Sticky inflation is everywhere right now after the pandemic and war in Ukraine, with each part of the world facing unique issues. Unfortunately, one thinktank has predicted Germany’s recession will be worse and longer than previously thought, while the Bank of England faces the prospect of causing a recession in the U.K. after a surprise high rate hike. We’ve got the details below.
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What’s happening in Germany?
Last month it was formally announced that Germany’s economy was in a recession, having seen two-quarters of economic decline in a row and that it would take longer for the country to emerge from its financial woes.
This week there was news that Europe’s largest economy may contract even more sharply than expected, with German gross domestic product expected to drop by 0.4% this year instead of by 0.1%.
The Ifo Institute has also cut Germany’s forecast to 1.5% GDP growth, a downgrade from the 1.7% expected. German inflation, like much of the world, has been sticky, but is expected to fall to 5.8% by the end of the year from its current 6.9% figure.
What about the U.K.?
May’s inflation figures were absolutely abysmal. The U.K. has the worst inflation of the G7 countries, currently sitting at 8.7%, unchanged from the previous month. To make things worse, core inflation increased by 0.4% to reach 7.1% — the highest level in 30 years.
The Bank of England, in what many are seeing as a panic response, decided to raise the interest rates from 4.5% to 5% instead of the anticipated quarter-point hike. A lot of blame is being thrown around in the country — the Bank of England’s monetary policy, wage increases, the Conservative government and *whispers* Brexit have all been bandied about — but in all honestly, it’s likely a mix of the whole lot.
The surprise rate hike means that the chances of a recession are now much higher in the U.K. This is due to many British homeowners coming off of two-year fixed-rate mortgage deals, which are the norm in the U.K., and facing hundreds of pounds per month extra in payments.
The bottom line
No country is having a fun time with inflation right now after years of a pandemic and printing more money, but some are feeling the heat more than others. The so-called ‘sick men’ economies in Europe are Germany and the U.K. for at least the rest of the year.
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