gases, fertilisers and food products, in particular grain, have become, at least in the meantime, notably more expensive. furthermore, the war and the related sanctions are again distorting various supply chains, as both russia and ukraine produce a number of goods needed in the retail trade and at upstream stages of production. in february already, disruptions to ukrainian supplies of cable harnesses for motor vehicles led to production stoppages at many car plants in germany, including volkswagen ’ s factory in wolfsburg. another critical good is neon gas. before the war, ukraine was producing more than half of the global supply of this noble gas, which is a key ingredient for making microchips. shortly after the start of military hostilities, production came to a halt. in particular, ingas, one of ukraine ’ s two neon producers, is located in the city of mariupol, which has been occupied and heavily destroyed by russian troops. this production stoppage might impose significant constraints on the worldwide output of microchips. 2 additional distortions of supply chains are being caused by airspace closures, blocked seaports, shipping avoiding the black sea, and a lack of truck drivers. all these factors are adding to the upward pressure on inflation that already existed due to pandemic effects. however, the russian aggression could also affect price dynamics through a change in economic activity. before the war, our experts had been expecting to see a notable economic recovery in spring. the russian aggression, however, clouded the economic outlook in germany. as the war continues, there is a significant risk of a further escalation, which would entail larger direct and indirect effects on inflation. tougher economic sanctions, e. g. including a complete embargo of russian energy exports to europe, have become increasingly likely. these would cause another spike in energy commodity prices and weigh on the economic outlook, at least in the short term. the bundesbank recently published a model - based scenario analysis estimating the effects of an immediate stoppage of energy imports from russia on the german economy. in this scenario, the german economy might even slide into recession, with real output contracting by up to 2 % in 2022. 3 this could exert a degree of disinflationary pressure. nevertheless, on balance, the inflationary factors of sanctions such as an energy embargo would clearly prevail, at least in the short term. 2 / 7 bis central bankers'speeches it

and downs of the global economy. thus, suggestions have been voiced to adapt the german “ business model ” and reduce reliance on exports. however, these arguments neglect the fact that germany is not a company with a business model that management can change at will. in the end, it is the decisions of thousands of individual companies that determine the structure of an economy. in any case, i have doubts that turning away from global markets would strengthen the german economy. facing global competition ensures that german companies keep up with technological progress and retain their high productivity. this might come at the price of higher volatility, but to me this seems like a price worth paying. having said that, the german economy would certainly profit from strengthening competition in the domestic market as well. take the services sector as an example. for the last bis central bankers ’ speeches 20 years, total factor productivity growth in services has been markedly lower than in manufacturing. in fact, while total factor productivity in manufacturing has grown by more than 30 %, growth in services has barely budged. what is behind this phenomenon? the data point to a higher degree of competition in the manufacturing sector following the launch of the common market : mark - ups, an indicator of the pricing power of firms, have gone down since then. by contrast, mark - ups on services have stayed high in germany, higher even than in many other european countries. thus, there is room to improve the functioning of the services sector by promoting competition : opening up closed professions, cutting red tape, and improving financing conditions for nascent digital firms would be options to achieve this objective. but still, over the last two years or so, domestic drivers of growth have strengthened in germany. this is certainly good news, as the basis for growth has become broader. the good shape of the german economy is also reflected in more recent developments. last year, the economy regained momentum after a brief dip in late 2012 and early 2013. and in the first quarter of this year, the economy grew by 0. 8 %, while the euro area as a whole grew by 0. 2 %. however, the strong growth in the first quarter was boosted by favourable weather conditions. consequently, we expect growth to be weaker in the second quarter. overall, the german economy is back within the normal range of capacity utilisation. against this backdrop, what can we expect from the future? well, the internal drivers of growth i mentioned will remain in place while foreign demand is likely to pick