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The headquarters of the European Central Bank (ECB) pictured on February 03, 2022 in Frankfurt, Germany.
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Germany’s energy worries are over and Europe’s largest economy has the “inherent strength” to recover from the dual shocks of the pandemic and the war in Ukraine, according to Bundesbank President Joachim Nagel.

The International Monetary Fund on Tuesday projected the German GDP will contract by 0.1% in 2023, becoming the second worst performer among major economies behind the U.K., before expanding by 1.1% in 2024.

Central to concerns about the economic outlook for Germany and the wider continent over the past year has been the potential for an energy crisis, as Europe strives to curb its reliance on Russian gas following Moscow’s full-scale invasion of Ukraine.

German output decreased by 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 Spring Meetings that he is “more positive than the IMF” and does not see a recession this year.

“The German economy proved a lot over the past couple of weeks and months, so the adaptation capacity of the German industry is pretty high, the energy crisis is more or less solved. So we had a really worried situation in the past, but this is now over, and the outlook is good,” he told CNBC’s Joumanna Bercetche.

He asserted that Germany’s progress in diversifying its liquefied natural gas supply away from Russia, and its increased storage — resulting from built up capacity during the mild winter — meant the country’s economy is well placed to weather the next cold season as well.

The latest available purchasing managers’ index readings showed German manufacturing, which accounts for around a fifth of the country’s economy, experienced its sharpest fall in activity for almost three years in March and hit its lowest level since May 2020.

However, Nagel claimed that this was down to lingering effects of the Covid-19 pandemic and Russia’s war in Ukraine, insisting that “we shouldn’t forget where we came from.”

“The German industry has a good capability to deal with the situation, there is this inherent strength of the German economy, and I believe they will overcome this, and they will go back to the levels we saw before the pandemic,” he said.

Sticky core inflation

The European Central Bank hiked interest rates by another 50 basis points in March to bring its main rate to 3%, as the continent continues to grapple 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 away volatile food, energy, alcohol and tobacco prices — increased to an all-time high of 5.7%.

Nagel said the persistence of high core inflation showed the ECB Governing Council, in which he is considered one of the more hawkish members, has further to go in tightening monetary policy.

He expects core inflation to eventually follow the headline figure downwards, but reiterated that policymakers have to “stay really alerted when it comes to the inflation story.”

“What is also important to me, we went through some financial market turbulence uncertainty over the last five weeks and now we have to find out what was the impact out of that, and we have to wait for the incoming data until we have our next meeting in May, and then we will see,” he said.

German banking ‘very robust’

Financial markets were roiled in March by concerns about the banking sector. The collapse of U.S.-based Silicon Valley Bank early last month triggered contagion fears that eventually took down several U.S. 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 hike to interest rates despite concerns about the economic impact of the banking turmoil, and Nagel hopes this sent an important message to markets.

“There is no contradiction between what we have to do on the price stability side and on the financial stability side,” he said.

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

Deutsche Bank shares sold off sharply over a few days in March after a sudden spike in the cost of insuring against its default. Analysts largely attributed this to misplaced market panic, but also to concerns about the German lender’s well-documented exposure to commercial real estate, which is considered a particularly weak link in the U.S. economy.

Nagel insisted 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 German banking sector is very robust,” he said.

“I think, compared to 15 years ago, they are much better capitalized, better liquidity situation, so I do not have doubts.”

Although he reaffirmed the ECB’s commitment to fighting inflation, Nagel acknowledged that policymakers “have to be cautious” and keep an eye on parts of the economy that may be affected if rates continue to rise.

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