(Bloomberg) -- The German economy will shrink through the middle of next year as businesses and households struggle with high energy costs — before a nascent recovery takes hold, according to the Bundesbank.

Output is seen declining by 0.5% in 2023, the institution said in an update to its economic forecasts. Growth will be weaker than previously projected in 2024, while the inflation outlook was revised up.

Russia’s war in Ukraine is weighing heavily on the German economy, Europe’s largest, whose manufacturing sector is reeling heavily under price surges for electricity and gas. Price caps going into effect in March are expected to somewhat cushion the hit.

Bundesbank President Joachim Nagel is already looking beyond the summer. 

“Economic activity should shrink initially, but from the second half of 2023 we expect a gradual recovery,” he said in a statement. Production capacity should be utilized normally again in 2025, the Bundesbank said, adding that projections are still subject to exceptionally high uncertainty.

With inflation in Germany — as well as the euro zone — remaining above 2% through 2025, the European Central Bank must continue to act forcefully, Nagel said.

“Looking at the euro area as a whole, we mustn’t let up in our monetary-policy efforts to bring inflation back to our target of 2%,” he said.

The ECB raised rates by half a point on Thursday, bringing the deposit rate to 2%, and President Christine Lagarde signaled that a series of increases by that magnitude will follow next year. Policymakers also decided to start rolling off some of the bonds it purchases since 2015.

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