Joint Economic Forecast Spring 2023: Inflation High at Core - Strengthen Supply Forces Now

The economic setback in the winter half of 2022/2023 is likely to have been milder than feared in the fall. The supply-side disruptions that have been weighing on the German economy for some time have eased. However, a noticeable decline in inflation rates will be some time coming, as the demand pull is unlikely to diminish for the time being. In addition to the government relief measures, this will also be helped by the foreseeably high wage increases. At 6.0%, the inflation rate in 2023 will be only slightly lower than in the previous year. Price-adjusted GDP will increase by 0.3% this year and by 1.5% next year.

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The manufacturing sector is expected to support economic activity in the coming quarters, benefiting directly from the easing of supply bottlenecks and cheaper energy. As real wages pick up again, private consumption will also contribute to the overall economic expansion in the further course. By contrast, the construction sector will slow the economy, even though production there increased at the beginning of the year, probably due to weather conditions. Demand will remain weak in residential construction in particular, partly because the European Central Bank will continue to tighten its monetary policy and financing costs will therefore rise further.

“The economic setback in the winter half-year 2022/2023 is likely to have been less severe than feared in the fall. The main reason is a lower withdrawal of purchasing power as a result of significantly declining energy prices.”

Prof. Dr. Timo Wollmershäuser, Deputy Director of the ifo Center for Macroeconomics and Surveys and Head of Forecasts

Inflation Ebbing

The peak of the inflation wave has probably been reached by now, with measured inflation being dampened for the time being by government price brakes for electricity and gas. However, a noticeable decline in consumer price inflation will be some time coming, as the demand pull is likely to continue for the time being. In addition to government relief measures, this will be helped in particular by the expected strong rise in collectively agreed wages. Real wages are expected to pick up again in the course of the year and private consumption should make a positive contribution to overall economic expansion again in the coming year. At 6.0%, the inflation rate in 2023 will be only slightly lower than a year earlier. The rate is not expected to fall noticeably until next year, in particular due to declining energy prices. The decline in the core inflation rate (i.e. the increase in consumer prices excluding energy) will initially be much weaker. It is expected to fall only slowly from 6.2% in the current year to 3.3% in the coming year.

Good News for the Labor Market

The number of people in work is expected to increase further, from 45.6 million in 2022 to 45.9 million in 2023 and 46.0 million in 2024. The number of unemployed will rise temporarily this year from 2.41 to 2.48 million as Ukrainian refugees do not immediately gain a foothold on the labor market. Next year, however, unemployment is expected to fall again to 2.40 million.

Government Financing Deficit Remains

The government will reduce its financing deficit only slightly to 2.2% of nominal GDP in the current year because fiscal policy is sticking to its expansionary course for the time being. The deficit is not expected to fall to 0.9% until next year. The current account balance will rise again to 6.0% of economic output by 2024, after falling temporarily to 3.8% last year as a result of the sharp rise in energy import prices in particular.

Economic policy: Need for reform

In recent years, economic policy has largely let the supply-side reins slip, even in times when there was no acute crisis management. The need for reform is all the greater now, particularly to meet the challenges of demographic change and the energy transition. Both require potential-strengthening measures, also to contain the intensifying distribution conflicts.

Infographic, Gross Domestic Product in Germany, 1 q 2023

Global Economy Remains Weak

In spring 2023, the global economy remains weak. In many places, the purchasing power of private households is being eroded by high inflation and overall economic demand is being dampened by rising interest rates. Although the opening up of the Chinese economy following the end of the pandemic is improving the economic outlook, particularly in Asia, the manufacturing sector there is suffering from the effects of the economic crisis. However, the manufacturing sector there is feeling the effects of the end of the boom in IT goods and semiconductors. In Europe, high energy prices are also weighing on households and businesses.

The institutes expect global production to grow by 2.0% this year and 2.6% next year. In the emerging markets, the increase in production in 2023 will be supported above all by the economic recovery in China and the high momentum in India. Over the forecast period, growth rates are expected to be 3.9% (2023) and 4.4% (2024). For the advanced economies, the institutes expect output to expand by 0.9% in the current year and 1.5% in the coming year. For the euro zone, the expected increase in GDP is 0.9% in 2023 and 1.6% in 2024.

Following growth of 3.2% last year, global trade in goods will probably initially be weak in the current year and pick up only slowly. On an annual average, the institutes expect growth of 0.4% this year and 2.8% next year. Although inflation in the advanced economies is expected to fall to 4.8% in 2023 and 2.4% in 2024, it will remain significantly higher than the long-term average, as core inflation is unlikely to decline rapidly, also due to expansionary monetary and fiscal policy in previous years.