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The skyline of the banking district in Frankfurt, Germany, on Sept. 18, 2014.Kai Pfaffenbach/Reuters

The German economy would contract by nearly 2 per cent this year if the war in Ukraine escalated, resulting in a boycott of Russian energy, weaker external demand and greater uncertainty, the Bundesbank said on Friday.

The German central bank said the fallout of Russia’s invasion of Ukraine was already weakening the euro zone’s economic recovery from its pandemic-induced slump.

But the picture would get much worse for the currency bloc, and particularly for manufacturing-heavy Germany, if events in Ukraine led the European Union to stop importing Russian crude oil, natural gas and coal.

“In the severe crisis scenario, real GDP in the current year would fall by almost 2 per cent compared to 2021,” the Bundesbank said.

“In addition, the inflation rate would be significantly higher for a longer period of time.”

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