The German government has lowered its economic growth forecast for this year to 2.6%, but raised its estimate for next year to 4.1%, citing supply constraints as a reason for the delay in the recovery in Europe's largest economy.

The updated government forecast for GDP growth contrasts to an April expectation of 3.5% growth in 2021 and 3.6% growth in 2022. According to two sources, the government now anticipates economic growth to normalise in 2023, with a rate of 1.6%.

On Wednesday, Economy Minister Peter Altmaier will deliver the government's most recent growth forecasts.

German manufacturing output is being held back by a shortage of semiconductors and other intermediate goods caused by supply chain disruptions induced by the COVID-19 pandemic, as well as a growth in chip demand in an increasingly digitalised world.

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Companies are also battling to meet increased demand due to raw material shortages, in addition to the supply issues with electronic components.

According to one of the sources, widespread production bottlenecks, along with unusually high demand, are causing price hikes, which is why the German government anticipates consumer price inflation to rise to 2.9% this year.

The government, on the other hand, is sticking to its prediction that the price increase will be temporary, with inflation expected to fall to 2.2% in 2022 and 1.7% in 2023.

The economy's growth outlook is mixed as the Ifo Institute reported that company morale deteriorated for the fourth consecutive month in October, reaching a six-month low.

It also aligns with the central bank's most recent assessment, which stated that economic growth is expected to decelerate dramatically in Q4, with full-year growth now expected to be substantially lower than the 3.7% forecast released in June.